China’s central bank tightens reserve requirements for offshore yuan banks
PBOC says move is aimed at smoothing out money market fluctuations
China’s central bank has tightened the way it calculates reserve requirements for banks dealing in offshore yuan, saying on Friday that it wanted to increase flexibility in liquidity management for financial institutions and help smooth out fluctuations in money markets.
Participating banks, including Bank of China (Hong Kong), will now have to set aside a fixed sum based on a percentage of their average level of yuan deposits over a previous quarter, replacing the current more relaxed calculation based on a quarter-end figure. The change takes effect from July 15.
It also changed the calculation method for onshore banks to a 10-day period average level of deposits, replacing the previous period-end requirement.
Australian investment bank ANZ said in a note on Friday that the new rules could tighten liquidity in the offshore yuan market, as banks would be motivated to cut their yuan holdings to avoid paying up for the new requirements.
“In June, offshore entities would try to reduce the average offshore yuan deposits over second quarter, so to reduce the reserve requirement which will be submitted in July - as the offshore yuan submission in July will be calculated based on the Q2 average deposits,” said rates strategist David Qu and analyst Louis Lam in the note.
“Going forward into the medium term, the offshore entities should be less willing to take in CNH deposits,” they said.