Foreign banks to be required to hold yuan in reserve
January 25, 2016 Category Finance, Weekly
China will require foreign financial institutions in the country to hold yuan in reserve, as the People’s Bank of China (PBOC) takes steps to curb speculative sell-offs of the Chinese currency. This new regulation will come into effect on January 25, the PBOC said in a statement. Until now, the reserve requirement ratio (RRR) for foreign banks, or the amount of depositor funds they must keep aside, was zero. For major financial institutions in China the RRR is 17.5% of their total deposits. Foreign central banks, sovereign wealth funds and international financial organizations will not come under the purview of the new requirement. The step is a long-term mechanism that regulates cross-border yuan-denominated fund flows and avoids irrational and speculative sell-offs of the currency, according to the PBOC. According to Guotai Junan Securities Co and Haitong Securities Co, more than CNY220 billion of funds will be frozen, which will tighten the renminbi supply in the offshore market and make it more expensive for speculators to short sell. “We believe China is sending a strong message to speculators and trying to stabilize renminbi depreciation expectations”, said Joey Chew, Asian Foreign Exchange Strategist at HSBC Holdings, the China Daily reports. The policy will increase the cost of short-selling offshore yuan and depress arbitrage based on the spreads of offshore and onshore yuan, according to China International Capital Corp (CICC), a Chinese investment bank. “The move will impact the liquidity of offshore yuan, so it can narrow the price gap between the offshore and onshore rates and therefore lessening the room or chances for foreign institutions to short the yuan,” said Nomura International China Economist Wendy Chen.
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