Due to the historic fact that China’s currency, yuan’s, exchange rates at home and abroad diverge by the most in the months from December to March, the country’s authorities have suspended at least two foreign banks from conducting some cross-border yuan operations, said local media reports quoting people with direct knowledge of the matter.
The People’s Bank of China has imposed a three-month ban on settling offshore clients’ yuan transactions in the onshore market, said sources who did not want to be identified because they weren’t authorized to speak publicly on the matter.
The widening offshore-onshore spread makes it profitable to buy the currency in Hong Kong and sell it in Shanghai and this was the reason behind the clampdown. This matter was earlier reported in the media but the PBOC did not immediately respond to questions regarding the matter form the media.
In the biggest discount since September 7, the yuan is 1.7 percent weaker in Hong Kong’s freely traded market than it is in Shanghai. Following an August 11 devaluation that spurred an exodus of funds from the world’s second-largest economy, the difference has widened to more than 2 percent. As the central bank bought yuan to stem depreciation, the foreign-exchange reserves in China tumbled by more than $400 billion this year.
“Earlier, some banks were supposed to be penalized for engaging in arbitrage between the offshore and onshore markets. If the PBOC sees it’s a genuine trade, they’ll probably let you proceed. If they suspect you are manipulating, they want to clamp down. What they want to see is a natural convergence of the two yuan rates,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore.
The PBOC said that the wide gap in the currency values on-shore and off-shore would be narrowed if there was trading by more foreign institutions with significant volumes in the onshore foreign-exchange market. This prompted the PBOC to allow such firms to trade in on-shore markets.
Zhou Hao, an economist at Commerzbank AG in Singapore said that the PBOC is unlikely to allow the gap to stay persistently above 1,000 so-called pips because it hurts sentiment.
With a spread of 1,144 pips, the offshore yuan was last trading at 6.6045 a dollar in Hong Kong and the rate in Shanghai was 6.4901. Experts predict that the yuan is poised for the biggest annual decline in more than two decades as the onshore rate has weakened 4.4 percent this year.
News agency Reuters has reported that liquidation of spot positions for clients, some services related to the cross-border as well as the onshore and offshore businesses have been stalled for the three months by the PBOC. The two prices will eventually converge and the authorities have already set a target by 2020 and this clampdown is a short-term market adjustment, said UOB’s Suan.
“The PBOC’s move means that the lenders will no longer be able to do arbitrage trades in the onshore and offshore yuan. This may lead to a widening spread because cross-border flows help narrow the gap. I don’t see any immediate negative impact on the yuan’s internationalization,” said Ken Cheung, a Hong Kong-based strategist at Mizuho Bank Ltd.
(Source:www.bloomberg.com)
The People’s Bank of China has imposed a three-month ban on settling offshore clients’ yuan transactions in the onshore market, said sources who did not want to be identified because they weren’t authorized to speak publicly on the matter.
The widening offshore-onshore spread makes it profitable to buy the currency in Hong Kong and sell it in Shanghai and this was the reason behind the clampdown. This matter was earlier reported in the media but the PBOC did not immediately respond to questions regarding the matter form the media.
In the biggest discount since September 7, the yuan is 1.7 percent weaker in Hong Kong’s freely traded market than it is in Shanghai. Following an August 11 devaluation that spurred an exodus of funds from the world’s second-largest economy, the difference has widened to more than 2 percent. As the central bank bought yuan to stem depreciation, the foreign-exchange reserves in China tumbled by more than $400 billion this year.
“Earlier, some banks were supposed to be penalized for engaging in arbitrage between the offshore and onshore markets. If the PBOC sees it’s a genuine trade, they’ll probably let you proceed. If they suspect you are manipulating, they want to clamp down. What they want to see is a natural convergence of the two yuan rates,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore.
The PBOC said that the wide gap in the currency values on-shore and off-shore would be narrowed if there was trading by more foreign institutions with significant volumes in the onshore foreign-exchange market. This prompted the PBOC to allow such firms to trade in on-shore markets.
Zhou Hao, an economist at Commerzbank AG in Singapore said that the PBOC is unlikely to allow the gap to stay persistently above 1,000 so-called pips because it hurts sentiment.
With a spread of 1,144 pips, the offshore yuan was last trading at 6.6045 a dollar in Hong Kong and the rate in Shanghai was 6.4901. Experts predict that the yuan is poised for the biggest annual decline in more than two decades as the onshore rate has weakened 4.4 percent this year.
News agency Reuters has reported that liquidation of spot positions for clients, some services related to the cross-border as well as the onshore and offshore businesses have been stalled for the three months by the PBOC. The two prices will eventually converge and the authorities have already set a target by 2020 and this clampdown is a short-term market adjustment, said UOB’s Suan.
“The PBOC’s move means that the lenders will no longer be able to do arbitrage trades in the onshore and offshore yuan. This may lead to a widening spread because cross-border flows help narrow the gap. I don’t see any immediate negative impact on the yuan’s internationalization,” said Ken Cheung, a Hong Kong-based strategist at Mizuho Bank Ltd.
(Source:www.bloomberg.com)