PBOC Cancels Foreign Exchange Risk Reserves, Offshore Yuan Plummets Nearly 1000 Basis Points
Liao Shumin
DATE:  Sep 12 2017
/ SOURCE:  Yicai
PBOC Cancels Foreign Exchange Risk Reserves, Offshore Yuan Plummets Nearly 1000 Basis Points PBOC Cancels Foreign Exchange Risk Reserves, Offshore Yuan Plummets Nearly 1000 Basis Points

(Yicai Global) Sep. 12 -- China's central bank, the People's Bank of China (PBOC), has taken measures to regulate long positions after enforcing restrictions on short-selling of shares.

The yuan saw a big fall after speculation on Sept. 8 that the bank would stop collecting foreign exchange risk reserves. The central bank confirmed this move today.

The onshore yuan-dollar exchange rate declined sharply on Sept. 11, down over 400 basis points to reach a low of 6.5279. The decline marked a drop of almost 900 points from its highest level of 6.4345 on Sept. 8.

The offshore yuan-dollar exchange rate broke of 6.53 on Sept. 11, plummeting almost 1,000 points from a high of 6.4387 on Sept. 8 to 6.5393.

The recent setting of the yuan's central parity exceeded market expectations, various market participants noted.

The redback's central parity against the dollar rose 35 basis points to CNY6.4997 on the morning of Sept. 11, marking another 16-month high. It also marks the 11th straight day of increases and the longest consecutive rise since the beginning of 2011.

The increase in the yuan's central parity on the same day did not fulfill market expectations. The prior trading day saw the dollar index experience five consecutive drops on the international market, and closed at the lowest level for the mid-day since the start of 2015.

The spot yuan-dollar exchange rate closed at CNY6.4617 in the onshore market, a significant increase of 355 basis points.

PBOC has canceled reserves for foreign exchange risks because the yuan is expected to move on an opposite path compared to its trajectory over the last few years. The recent significant increases in exchange settlement among enterprises and bank transactions have resulted in erratic appreciation of yuan, even affecting some exports, a key driving force of China's economy.

Market rumors on Sept. 8 stated that PBOC would adjust the foreign exchange risk reserve ratio for long-term forex sales carried out by domestic financial institutions from 20 percent to zero on Sept. 11.

The bank will also implement a standard reserve requirement ratio for domestic deposits of overseas financial institutions, state-owned news agency Xinhua quoted Sun Guofeng, president of PBOC's financial research institute, as saying.

The adjustments are necessary as the current market environment has undergone great changes, and the previous counter-cyclical macro-prudential management measures have now returned to neutral, said Sun.

Both academics and the industry generally believe that the yuan's exchange rate is fully reflected in economic fundamentals and overall it is at a reasonable and balanced level, he added.

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Keywords:   Onshore Exchange Rate,Offshore,Yuan,U.S. Dollar,Pboc,Reserve Requirement Ratio,Funds Outstanding For Foreign Exchange