Overnight, China decided to take steps to reduce “macro financial risks.”

And by that they mean “do something quick to help ease pressure on the yuan” and by extension, on the PBoC’s rapidly depleting FX reserves.

To that end, starting October 15 banks will have to hold the equivalent of 20% of clients’ FX forward positions with the PBoC, where the money will sit, frozen, for a year, at 0% interest.

Obviously, that will drive up the cost of taking speculative positions which the PBoC hopes will help narrow the gap between onshore and offshore yuan and bring down volatility, although the degree to which this will help fill the CNY-CNH spread looks like an open question.

“It’s a move to ease the reduction in foreign-exchange reserves,” Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong, tells Bloomberg. “It will also remove lots of speculative trades that aim at short-term gains as the reserves have a minimum lock-up period of one year,” adds Stan Chart’s Becky Liu. 

Here’s a bit of color from FX strategy desks via Bloomberg:

  • Andy Ji, Singapore-based currency strategist at CBA:
    • This is typical FX control, as it limits the FX forward positions
    • PBOC has intervened before in the forward market, but imposing the 20% limit on outstanding forward position will require less intervention effort
    • Spread on CNY and CNH may not substantially narrow on this move alone, as global demand on dollar remains high and China economic grow remains slow
  • Fiona Lim, Singapore-based senior FX analyst at Maybank:
    • This seems to be another move to discourage yuan forward selling and to lower yuan depreciation expectations
    • Offshore-onshore yuan gap has been pretty persistent because of yuan depreciation expectations and officials want to narrow the gap
    • Gap will be sustained as the economy continues to remain under pressure
  • Becky Liu, senior Asia Rates strategist at Standard Chartered:
    • Move aims to curb speculative onshore positions, anchor onshore forwards and hopefully eventually also bring down offshore forwards
    • This move itself would reduce the need for PBOC to intervene in the onshore market
    • Don’t think it will ease reduction in FX reserves; it basically is just making it a lot more costly to long USD in the onshore market
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