The net foreign-exchange forward purchases of corporate clients reached a record high of US$68 billion in August in China, nearly half of their spot purchases. Such demand, when combined with the surge in the forward transactions reported by the China Foreign Exchange Trade System, confirms the People's Bank of China's concern that some of the trades could be speculative, HSBC Global Research says in its latest report. The central bank has referred to such speculative flows as a key reason for the introduction of the 20 per cent reserve requirement ratio for banks that conduct forward transactions for clients. "To us, the PBOC's concern is warranted," the bank says. "We have highlighted before that US dollar-yuan foreign-exchange swaps have a strong correlation with hot money flows, essentially reflecting that corporates' foreign-exchange hedging, loans and trade financing activities are more likely to be done with forwards rather than in the spot market."
