China‘s central bank said on Monday it will start implementing a reserve requirement ratio (RRR) on offshore banks‘ domestic deposits, in what appears to be its latest attempt to stem speculation in the yuan and manage money flowing in and out of the country.
Confusion over China‘s foreign exchange policy and its commitment to reforms has sparked mayhem in global financial markets in recent weeks as the People’s Bank of China (PBOC) allowed the yuan to fall sharply and then moved in aggressively to try to steady it.
Sources told Reuters on Sunday that the PBOC is preparing to raise the reserve requirement ratio next week for yuan deposits placed in yuan clearing banks. The rate is currently at zero.
The PBOC on Monday confirmed the move would be effective on Jan. 25, saying it would help set up a long-term mechanism to regulate cross-border yuan fund flows and would help offshore financial institutions better manage their yuan liquidity.
But it made no mention of increasing restrictions on banks in its statement, adding to uncertainty in markets about China‘s policy intentions.
Some analysts said the announcement may at this stage be a more symbolic warning to banks, aimed at discouraging them from being too active in cross-border yuan transactions as part of the PBOC’s broader campaign to stabilise the yuan.
The offshore yuan, or CNH, fell earlier this month to its lowest level since trading began in 2010 on fears that China was planning to sharply devalue it to boost its ailing economy.
By midday on Monday, the offshore yuan was trading 0.13 percent weaker than the onshore spot at 6.5873 per dollar.
“The market sees that this is a gesture by PBOC to warn speculators that are betting on a fast depreciation of its currency,” said Zhou Hao, senior emerging market economist for Asia at Commerzbank in Singapore.
If it forces banks offshore to hold more yuan in reserve, it would reduce the amount of the currency available in the market, squeezing supply further and making it more difficult and expensive for speculators, some analysts say.
“This will have a tightening effect on CNH funding, and follows (the PBOC’s) reported intervention last week and other measures in recent months,” a report from HSBC said. “From a medium-term perspective, this will also allow PBOC to have greater control of CNH money creation.”
HSBC estimates offshore yuan deposits totalled 1.45 trillion yuan ($220.40 billion) in the four main markets of Hong Kong, Taiwan, Singapore and South Korea as of last November.
However, some hold a different view, with Frances Cheung, head of rates strategy at Societe Generale in Hong Kong, saying the move could discourage offshore banks from bringing yuanonshore, which could actually improve offshore liquidity.
“The exact impact depends on the flexibility of offshore participating banks in utilising the RMB that would otherwise be deposited at clearing banks, and also depends on how this extra cost is passed onto participating banks by the clearing banks,” said Cheung.
The PBOC has been under increasing pressure from policy advisers to let the currency fall quickly and sharply, after spending billions of dollars buying yuan over recent months to defend the exchange rate.
China‘s foreign exchange regulator has ordered banks in some of the country’s major import and export centres to limit purchase of U.S. dollars this month.
According to other sources and HSBC analysts, the deposits that will be affected by the latest announcement include:
1) Offshore participating banks‘ CNH deposits placed with onshore correspondent banks;
2) CNH deposits from Bank of China Hong Kong and Macau with PBoC Shenzhen and Zhuhai;
3) other offshore clearing banks‘ CNH deposits placed with onshore parent banks.
“We haven’t heard anything from clearing banks or correspondent banks on the reserve requirements. If they ask us to put money as reserve requirements, we can easily get all ouryuan deposits to the offshore market,” said a deputy head of treasury at a yuan business participating bank in Hong Kong.
The rule applies to yuan deposits from offshore financial institutions that are put in onshore financial institutions, excluding foreign central banks, monetary authorities, international financial organisations and sovereign wealth funds.