PBOC to relax hedging rules as yuan strengthens

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The People's Bank of China (PBOC) on Monday moved to lower the reserve requirements for financial institutions settling foreign exchange forward yuan positions. Analysts attribute the decision to an easing of capital outflows and a stronger yuan.

PBOC removed the 20 % reserve requirement for financial institutions settling foreign exchange forward yuan positions on Monday. The central bank also said it has stopped requiring foreign banks to set aside reserves for offshore yuan deposits in China. That will significantly reduce the costs for yuan forward trading activities.

Analysts attribute the changes to market conditions, and that the yuan's strength against the dollar this year has reflected improvement in the Chinese economy. The yuan has gained over 7% so far in 2017, more than making up the nearly 6.6% drop it suffered in 2016.

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China's central bank set the onshore yuan midpoint at 6.4997 per dollar on Monday. That strengthened the yuan beyond the key psychological 6.5 level for the first time since May 2016. Monday's midpoint was 35 pips firmer than the previous fix.

Despite the stronger midpoint, the offshore and onshore yuan were both trading below the 6.5 level on Monday, following the news of relaxation in capital controls.

Analysts point out that the PBOC's move to scrap reserve requirements would hedge the yuan's appreciation trend in the foreseeable future.

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