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China’s Central Bank Restricts Forex Operations Of Foreign Banks

people's bank of chinaRecent reports indicate that the Chinese central bank has temporarily suspended foreign exchange operations of at least three foreign banks until end of March 2016.

This measure is said to be an attempt by China’s central bank, People’s Bank of China (PBOC) to stabilise the Chinese yuan after its devaluation in August 2014. Offshore yuan or renminbi (utilised in markets outside China) is less tightly regulated than the onshore yuan.

Since the recent revaluation, the difference between the two is growing sharply causing issues for the PBOC in managing its currency and curtail outflow of capital.

Forex analysts in China report that some of the forex transactions barred for these banks include liquidation of sport positions, other operations related to cross-border, onshore and off-shore business. The suspension notices sent by PBOC to the banks in question give no reason for sudden decision. However, there are reports that large-scale cross-border Forex transactions could be the main reason why the PBOC decided to make this decision. These banks have been advised not to engage in any operations that take advantage of the differing exchange rates and if these instructions are violated then they will face additional actions such as blocking arbitrate channels.

In a statement, a financial economist who preferred to be anonymous speaking about the PBOC’s decision said

They hope to ease foreign exchange buying pressure and ease depreciation pressure on the yuan. But I don’t think the authorities will take very strong capital control measures, they are likely to reinforce the existing measures.

No formal statement has been released by the central bank. The names of the banks have also not been released. With no official data available on the major banks operating in China’s forex trade, there is no clear information on the names of these three banks. Banks like Citi, Deutsche Bank, HSBC have either declined to comment or not responded.

This latest move is in continuation of PBOC’s measures to manage fluctuations in the Chinese yuan in an economy experiencing its slowest growth in 25 years. It has previously asked banks in China to closely scrutinise foreign exchange transactions of its clients to prevent the illegal cross-border currency arbitrage between onshore and offshore yuan.

The International Monetary Fund recently announced the yuan’s entry into the fund’s basket of currencies which has led to speculation of its further depreciation and has put more pressure on the yuan. The onshore yuan which is traded in Shanghai has declined by 1.44 percent over last month, hitting 4-year lows repeatedly. Similarly, the offshore yuan, traded at Hong Kong, hit its lowest since 2011 at 6.5965 on December 30.