Tags: china | yuan | currency | capital

FT: China Restricts US, HK Dollar Purchases Amid Increased Popular Demand

FT: China Restricts US, HK Dollar Purchases Amid Increased Popular Demand
(Dollar Photo Club)

By    |   Saturday, 09 January 2016 11:12 AM

China reportedly is tightening dollar buying by individual and corporate clients amid increasing global market instability.

“The foreign exchange regulator has provided verbal guidance to banks in Shenzhen instructing them to limit dollar buying by individual and corporate clients,” a person with knowledge of the situation told The Financial Times.

The official Shanghai Securities News cited banks as saying that demand for U.S. and Hong Kong dollars had increased sharply since the start of the year. "Chinese residents are permitted to buy up to $50,000 annually, with the quota resetting at the beginning of the calendar year," the FT reported.

China’s foreign exchange reserves declined by a record $108 billion in December, a sign of accelerating capital outflow and the central bank’s spending to support the renminbi, or yuan, exchange rate.

The latest tightening comes after the central bank temporarily suspended some foreign banks in China, including Standard Chartered, Deutsche Bank and Singapore’s DBS, from conducting certain foreign exchange transactions designed to arbitrage the gap between the onshore and offshore renminbi exchange rates.

Meanwhile, Bloomberg reported that China ended an eight-day run of reductions to the yuan’s reference rate that sent shockwaves through financial markets and escalated fears of a global currency war.

The People’s Bank of China set the daily fixing, which restricts onshore moves to a maximum 2 percent on either side, at 6.5636 a dollar, 0.02 percent stronger than the previous day’s reference rate. It was cut 1.42 percent over the last eight days.

The yuan’s weakness is threatening to spark a cycle of competitive devaluations, Mexican Finance Minister Luis Videgaray said after his nation’s central bank spent $400 million supporting its currency on Thursday. The Standard & Poor’s 500 Index had its worst-ever start to a year over four days and about $4 trillion was wiped from the value of global equities in that time. Stock trading in China was suspended on two days as sliding prices triggered circuit breakers.

“It’s about time; the weak fix has really caused a lot of panic,” said Roy Teo, a Singapore-based currency strategist at ABN Amro Bank NV, which Bloomberg data show had the most-accurate forecasts for the yuan over the past year. "As much as there are economic reasons for a weaker exchange rate, I think the past few weak fixings have really caused a lot of uncertainty over whether they’re seeking to devalue the currency.”

The offshore yuan fell 0.03 percent to 6.6843 a dollar as of 4.03 p.m. in London, according to data compiled by Bloomberg. It sank as low as 6.7618 on Thursday, within 0.4 percent of a record 6.7850 seen in September 2010. The currency started trading in Hong Kong in the third quarter of 2010 and Bloomberg data goes back as far as August of that year. The onshore rate was little changed at 6.5938 in Shanghai on Friday.

In December, China set up an index comparing the yuan against a basket of 13 currencies, saying that it isn’t right to measure performance against the dollar alone. The yuan has “limited” room for further depreciation as slumping energy prices will help boost the current-account surplus in China, the world’s second-largest importer of oil, and offset capital outflows, according to a Goldman Sachs Group Inc. report this week.

The nation’s foreign-exchange reserves slid more than forecast in December, capping their first-ever annual decline, as authorities sought to prop up a weakening yuan.

"Friday’s fixing will stabilize sentiment and keep the yuan stable against a basket of currencies," said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. "The risk of the unknown still persists but it has improved a lot. The trend for the yuan to depreciate hasn’t changed, considering the fundamentals, but the PBOC’s policy stance is clearer."

While China has extended onshore yuan trading hours to 11:30 p.m., the central bank said last month that it would continue to view the 4:30 p.m. price as the closing level. This is significant because the monetary authority’s system of setting the yuan’s daily fixing uses the previous day’s close as one of the factors.

Investors should expect more volatility in Chinese markets as the government attempts to shift away from a planned economy to one driven by market forces, Mark Mobius, chairman of the emerging markets group at Franklin Templeton Investments, wrote in a blog post on Thursday. Policy makers face a “conundrum” as they seek to maintain financial stability while at the same time loosening their grip on markets, he said.

“Friday’s move is a reflection that the authorities want some stabilization and again aligns with the view that China doesn’t like one-way-bets,” said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Hong Kong.

"China doesn’t have a weak yuan foreign-exchange policy. It is allowing the currency to trade in a more flexible, market-oriented manner. This will imply room for further weakness in the near term."

(Newsmax wire services contributed to this report).

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China is ratcheting up ad hoc capital controls to stem accelerating capital outflows, with banks restricting dollar purchases amid fierce demand from households and companies.
china, yuan, currency, capital
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2016-12-09
Saturday, 09 January 2016 11:12 AM
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