Shenzhen traders profit from currency uncertainty

PUBLISHED : Tuesday, 31 March, 2009, 12:00am
UPDATED : Tuesday, 31 March, 2009, 12:00am

Shenzhen foreign-exchange dealer Fang Zhen has been worried for months by a surge in people exchanging yuan for Hong Kong dollars based on fears that the mainland currency would plummet in value amid the financial crisis.

The fears were so strong that they drove up demand for and the price of the Hong Kong dollar on the black market. People soon realised they could make quick money by buying Hong Kong dollars at official banks and selling them on the black market. Mr Fang said he had reported his concerns to his superiors at the China Construction Bank and industry supervisors at the People's Bank of China.

Since October, many people in Shenzhen had discovered they could make a profit from currency trading between official banks and the black market. The margin between the buying price for Hong Kong dollars listed by state banks and the selling price set by black market dealers was growing. By the Lunar New Year, the gap was up to half a percentage point, Mr Fang said.

The widening spread between the official and underground prices was spurred by expectations that the central government would heed calls from influential think-tanks since late last year for depreciation of the yuan against the US dollar, to help beleaguered exporters.

Mr Fang said the underground selling rate for the Hong Kong dollar climbed from about 0.875 in the middle of last year to 0.888 in late January and early February on the back of the revaluation calls.

'At the peak, the bank cash-buying rate was around 0.883 while the selling rate was 0.888 on the underground market,' he said.

He said the half a percentage point margin gave speculators great room to make money on the black market.

Under existing mainland policy, the government allows individuals to exchange up to US$50,000 in yuan a year.

'It means everyone has the right and chance to go to a bank and purchase up to HK$380,000 (equivalent to US$50,000). He only needs to show an identity card to bank staff,' Mr Fang said. 'In one round of buying from banks and selling on the black market, the speculators can make about 1,400 yuan in profit.'

The big interest in, and convenience of, the foreign exchange transactions had resulted in many more people flocking to banks for Hong Kong dollars than usual. 'I heard that some even hired migrant workers and used their ID cards to make money,' Mr Fang said.

The rise in transactions has not been noted officially but several Shenzhen bank branches conceded it was happening. 'Our branch is not big. Usually we sell a few tens of thousands of Hong Kong dollars each day but that has increased several times,' a Shenzhen Development Bank employee said.

Sales of Hong Kong dollars eased on March 13 when Premier Wen Jiabao told the National People's Congress the yuan's exchange rate would be kept basically stable despite falling exports. 'This is our independent decision and we will not be subject to any outside pressure on the appreciation or deprecation of the yuan,' Mr Wen said.

Mr Fang said that after the NPC meeting, the cash-buying rate of banks began to climb each day. 'That means the room for speculators was squeezed,' he said.

'Today's (Monday's) buying rate reached 0.8846 from 0.8832 [on Sunday]. I think the central government launched effective measures and expectations of a yuan devaluation will keep declining.'