Foreign banks in China to have greater capital requirements
Foreign financial institutions operating in China are to be required to hold reserves denominated in yuan, the country's central bank said it would mandate yesterday. The People's Bank of China said that the reserve requirements for foreign banks would be similar to the levels of those currently required of domestic lenders; major Chinese banks currency have a ratio of 17.5%. It said that the new rules would "prevent financial risk and protect financial stability" and "strengthen liquidity management".

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FOREIGN financial institutions in China will be required to hold yuan in reserve, the central bank said yesterday as it seeks to stabilize the currency.

Until now, overseas banks have been set a reserve requirement ratio — the amount of depositor funds they must keep aside — of zero.

From next week they will be subject to similar rules as domestic lenders, the People’s Bank of China said in a statement, without specifying the percentage to be retained. Major Chinese banks currently have a ratio of 17.5 percent.

The central bank said in a statement the move aimed to “prevent financial risk and protect financial stability.” It added that the new rules will “strengthen liquidity management.”

Setting a normal reserve requirement ratio for overseas financial institutions will “help subdue cyclical movement of cross-border yuan funds and guide overseas financial institutions in strengthening their management of yuan liquidity,” the statement said.

The policy will increase the cost of short-selling offshore yuan and depress arbitrage based on the spreads of offshore and onshore yuan, according to China International Capital Corporation, a Chinese investment bank.

The announcement comes as the yuan weakens on worries over a slowdown in the world’s second largest economy, which has caused a flight of capital and a widening gap in the offshore market, where investors are betting on further falls.

Offshore dealings in the yuan are free from the strict capital controls that China imposes domestically.

“The central bank wants to maintain the stability of the yuan rate because the expectations of depreciation have been rising,” said Nomura International China economist Wendy Chen.

“The move will impact the liquidity of offshore yuan, so it can narrow the price gap between the offshore and onshore rates and therefore lessening the room or chances for foreign institutions to short the yuan,” she said.

Zhou Hao, senior emerging markets economist for Asia at Commerzbank AG in Singapore, said: “The market sees that this is a gesture by the central bank to warn speculators that are betting on a fast depreciation of its currency.”

Last Friday, the yuan weakened sharply offshore, opening up a gap of more than 1 percent with the steady onshore market.

China’s central bank tightly manages the onshore market by setting a daily target for the yuan, which is allowed to trade within a 2-percentage point band either side.

The spot market opened at 6.5800 per dollar yesterday and was changing hands at 6.5790 by mid-afternoon, 0.08 percent firmer than the previous close. The central bank set a firmer tone by raising the mid-point to 6.5590.

The offshore yuan was trading at 6.5855 per dollar, around 0.1 percent softer than the onshore spot rate.

China’s currency has fallen around 5 percent since August, and while most analysts expect further weakening, authorities have been loath to allow it to depreciate too fast.

The new rules will not apply to foreign central banks, international financial institutions and sovereign wealth funds.

The central bank move is seen by some as being more of a symbolic warning, aimed at discouraging them from being too active in yuan dealings as part of its broader campaign to deter those betting offshore that the currency will fall.