One of the raft of emergency measures the People's Bank of China took to stabilise the yuan could end up hurting domestic companies by making it impossible for them to hedge their foreign exchange positions, bankers said. The reserve requirement on banks trading currency forwards on behalf of their clients, which will take effect from October 15, means the banks will have to park 20 per cent of the total value of such contracts with the central bank for a year at a zero interest rate. In a statement two weeks ago, the PBOC explained that its action was to tackle surging speculation on the foreign exchange market and the ensuing pressure on the yuan's value against the US dollar. "For companies with real hedging needs, it has no significant impact," PBOC said. But many bankers see it as a step too far. "Such a reserve requirement is way too costly and eats up any possible profit margins for banks doing these transactions," said a Chinese-based executive at a foreign bank, who declined to be named. "We will have to cease most of the forward business, only retain it with core clients. Companies' natural needs to hedge currency risks arising from imports and exports will not be met, especially small and medium-sized companies which are less resourceful with little access to the offshore market," he said. Smaller companies that import components from overseas and sell finished products in the domestic market will bear the brunt, said another foreign banker on the mainland. These companies are in great need of locking in the exchange rate for future payments when the yuan is projected to slip downward in the near term. "The authorities have no resources and no ability to tell true hedging deals from the false ones, therefore they can only take a cut-off approach. So much for the yuan's internationalisation if they continue to roll out such rigid polices," the foreign banker said. The yuan has been under severe selling pressure since the PBOC spooked the market with its mini-reform of the fixing mechanism last month. As confidence diminishes on the yuan's stability, companies have resorted to eliminating the risk through forward contracts that sell US dollars in the future. In August, banks signed a record 497.4 billion yuan worth of forward contracts selling US dollars to clients, almost triple the average amount in the first seven months and a record since the data was first disclosed by the State Administration of Foreign Exchange in 2010. The surge revealed speculation was involved, said the PBOC. Heng Koon How, a senior currency strategist at Credit Suisse, said the additional reserve mandate "is important to keep a lid on long-term forward rates and prevent any excessive depreciation bias. From a short-term perspective, these additional measures are important in restoring some sense of stability to both CNY and CNH." He added that the measures would dial down in the longer term. "Ultimately, the PBOC needs to guide the yuan towards being a freely floating currency and limit any active intervention which is against the spirit of free market trading." The PBOC explained that the new policy was neither a form of capital control nor an administrative intervention, but bankers see the scene getting increasingly topsy-turvy. "Those interventions only validate market concerns that the PBOC too has little confidence in the yuan's further direction," one of the bankers said. Biswajyoti Upadhyay, the head of greater China and North Asia product management transaction banking at Standard Chartered, said the eventual fix for exchange rate risks was to re-denominate trade and invoicing orders in yuan, thus eliminating the need for hedges. "It does require some bargaining power and, more importantly, trust, from overseas counterparts. In cases where companies have a collaborative counterpart, I would advise them to sit down and iron out re-denomination arrangements. For overseas companies, it will also help them diversify the treasury pool composition. "The market is looking to see the impact after implementation. PBOC has been open to suggestions from market participants. I wouldn't be surprised if, after being in force for some time, the PBOC moves to fine-tune the policy," he said.