UpdateChina's central bank to curb currency speculation with move to make it more expensive to bet on yuan’s weakness
Decision to impose reserve requirement on forward trading aimed at stabilising currency
Beijing's decision yesterday to impose reserve requirements on currency forward trading is expected to stabilise the yuan by pushing up the cost of selling the currency but may not be able to prevent its depreciation in the long run.
Banks will be required to submit 20 per cent of the sales of currency forward trading to the People's Bank of China as a reserve requirement from October 15.
The PBOC will conduct monthly checks on banks' reserve requirement pools, according to a document issued to banks and financial institutions yesterday.
The central bank said the move was "to improve the prudent management framework over the macro economy, prevent major financial risks, and promote steady operation of the financial institutions".
"This forward reserve measure is likely to rein in the forward curve and help stabilise [the yuan]," said Heng Koon-how, a strategist with Credit Suisse. "It is not surprising given that [the yuan] has been extremely weak in the forward markets since the August 11 devaluation."
The forwards have been pricing in a substantial depreciation in the yuan. The one-year US dollar-yuan forward had traded to a high of 6.75 last week, before retreating to 6.60 this week alongside a much more stable spot.
Heng said the forward reserve measure supported his view that the dollar-yuan spot would be relatively stable at 6.40 this month.