China tightens Forex trading rules in attempt to support the Yuan


The repercussions of “Black Monday” are still felt across global markets, with Chinese authorities taking extra measures to stabilize volatile stock and Forex markets.

According to a report by Reuters, China is implementing tougher rules in order to support the yuan.

A document, seen by Reuters on Wednesday, says that the People’s Bank of China (PBOC) will require reserves to be set aside for buying of all currency derivatives from October. This will make it more expensive to bet on depreciation of the Chinese currency.

The proposed measures will further expand the scope of a similar document, seen on Tuesday, in which the central bank said it will demand from banks to hold reserves on behalf of clients’ trading of currency forwards. This move is aimed at limiting speculation and volatility after a sudden Aug. 11 yuan devaluation.

pbocThe document seen on Wednesday states that reserve ratios on the currency market will be set at 20% of the nominal value of forwards and swap contracts, and fixed at 10% of the nominal value of principal for options.

Such a move may reduce depreciation pressure, but it will also reduce the need for the PBOC to sell foreign currency to purchase yuan. This strategy, however, bears risks, as in the past overactive interventions have affected negatively transaction volumes, hurting enthusiasm for holding yuan among international investors.

The yuan weakened 2.6% last month, marking its worst month ever.

In late trade on Wednesday, the spread between the onshore yuan and offshore spot CNH widened to about 1,000 pips, the highest level since September 2011, hinting that foreign investors are expecting deeper depreciation.

Beijing, however, has insisted that it sees no reason for further yuan weakness.

imagesIn a similar development, China’s State Administration of Foreign Exchange (SAFE) issued new rules on Wednesday easing restrictions on multinational companies’ management of their foreign currency-denominated debt in China, allowing them to pool debt from all their subsidiaries for central management.

In a separate move, the China Financial Futures Exchange said yesterday it would implement further measures to tackle excessive speculation in stock index futures trading. This the second tightening of rules by CFFEX in a matter of days.

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China tightens Forex trading rules in attempt to support the Yuan

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