(Reuters) - China’s central bank will require reserves to be set aside for purchases of all currency derivatives from October, according to a document seen by Reuters, as Beijing moves to make it more expensive to bet on more depreciation of the yuan.
The move expands the scope of a similar document, seen Tuesday, in which the central bank said it will require banks to hold reserves on behalf of clients trading of currency forwards, in a move to curb speculation and volatility after the Aug. 11 shock devaluation of the currency.
According to the People’s Bank of China document seen on Wednesday, reserve ratios will be set at 20 percent of the nominal value of forwards and swap contracts, and fixed at 10 percent of the nominal value of principal for options.
“People were thinking about alternatives to circumvent the reserve requirement to bet on yuan depreciation after yesterday’s policy was out. But it’s clear now that it is impossible to do so,” said a Hong Kong-based trader who saw the PBoC document.
The PBoC declined to comment when contacted by Reuters.
China’s central bank plans to tighten rules on trading of currency forwards from October, sources with direct knowledge of the matter told Reuters on Tuesday, in a move to curb speculation and volatility after a shock devaluation of the currency last month.
Surprised by the global reaction to its currency devaluation, Beijing has gone all out to try to cushion the impact.
The PBOC has also set a slew of strong daily trading midpoints for the yuan, increased how frequently it has state banks to sell dollars to support the currency and has conducted rare intervention in derivative markets.
NOT A COSTLESS STRATEGY
Some traders believe such high-frequency intervention in the spot market and the coming requirements in derivative trading are a step backward for China’s currency reforms.
Another concern is what Beijing’s end-game is, given that efforts to hold up the yuan so far have required it to drain its massive foreign exchange reserves.
If this latest move reduces depreciation pressure, it will also reduce the need for the PBOC to sell foreign currency to buy yuan. But it is not a costless strategy, as in the past overactive interventions have caused transaction volumes to tank, damaging enthusiasm for holding yuan among international corporations.
“Repeated intervention to maintain the currency’s stability is at odds with the ‘more flexible exchange rate mechanism’ the central bank announced just three weeks ago,” wrote Chen Long of Gavekal Dragonomics in a research note on Wednesday.
“This contradiction casts doubt over the PBOC’s intentions: whether it is serious about moving to a more flexible currency regime, or whether it has simply re-imposed a de facto peg at a different level against the US dollar.”
The yuan weakened 2.6 percent in August, its worst month on record. This has raised concerns a weakening yuan could provoke capital flight even as China’s wider economy stumbles. Offshore markets have been pricing the yuan at a discount to the onshore version.
Beijing has said it sees no reason for further yuan weakness, with a PBOC official giving Reuters a rare interview in which he defended China’s decision and said it should not be blamed for the global stock rout around the same time.
