China to scrap reserve requirement on yuan forward settlement

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China’s central bank plans to scrap reserve requirement for financial institutions settling foreign exchange forward yuan positions with effect from Monday.

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

“Banks will soon no longer need to set aside any additional RMB capital when trading FX forward for their clients in the offshore market,“ said Helena Huang, China economist at ICBC Standard Bank. ”This move will also significantly reduce the cost for yuan forward trading activities.”

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Beijing put the rule in place in October 2015 in a move seen as an effort to restrict dollar purchases when the yuan was weakening.

“In essence, this is a strong and positive FX de-regulation move that arrives at the right moment to reinvigorate the offshore CNH market,” she said.

This step “is actually a better way of approaching the situation than simply intervening in the foreign-exchange market,” said Robert Minikin, a foreign-exchange strategist at Standard Chartered Bank. “This is quite an important signal here, suggesting the authorities feel that the currency may be strong enough to damage exports.”

The potential move to do away with the reserve requirement “is a good way to signal discomfort with the pace of appreciation and shake out the market,” said Sacha Tihanyi, a strategist at TD Securities.

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Source(s): AP ,Reuters ,Xinhua News Agency