PBOC cuts shorting costs to curb surging yuan

Business | Ageinces and Avery Chen 12 Oct 2020

China's central bank said it will lower the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading to zero with effect from today.

Under current rules, financial institutions must set aside 20 percent of the previous month's yuan forwards settlement amount as foreign exchange risk reserves.

The move came after the onshore spot yuan rate ended at a 17-month high on Friday against the dollar, its biggest one-day percentage gain since 2005. The yuan has gained more than 6 percent against the dollar since late May.

The 20 percent reserve requirement ratio was imposed in 2018 when the currency slumped toward 7 per dollar.

The step is likely to prompt bullish traders to pare back optimism, at least for now. Back in September 2017, when the PBOC similarly cut the cost to zero following sharp gains, the yuan slumped about 2.5 percent in the next three weeks. The move also shows how the PBOC continues to pull on levers to influence the currency, undermining the yuan's potential as a haven.

Meanwhile, Shenzhen will give citizens 10 million yuan (HK$11.58 million) worth of digital yuan to promote the application of the new form of currency. The program, in collaboration with the central bank, will issue the currency in 50,000 "red envelopes" worth 200 yuan each via a random draw, which attracted more than 19 million applications.

China also proposed to start the China depositary receipts trial program in Shenzhen, which would allow innovative companies listed overseas to issue a form of new share in the domestic market.

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