China’s central bank has scrapped two rules intended to strengthen the renminbi, in a sign that official nervousness about currency depreciation and capital flight has eased.
The renminbi has gained 6.9 per cent this year, reversing all of last year’s record loss of 6.5 per cent and putting the currency on pace for its best year ever. China’s foreign exchange reserves have risen for seven straight months since hitting a three-year low in January.
In a notice sent to banks late on Friday, the People’s Bank of China dropped a requirement that raised the cost of using currency forwards — a type of foreign-exchange derivative — to bet on renminbi depreciation, according to a senior foreign-exchange trader at a Chinese bank in Shanghai.
Separately, the PBoC eliminated a requirement that banks hold reserves against renminbi deposits held in Hong Kong and other offshore centres, according to a foreign bank executive in Beijing briefed on the offshore deposit rule.
The renminbi was 0.25 per cent weaker at midday on Monday and on pace for its biggest one-day fall in a month, after ending Friday afternoon at 6.4617 per dollar, its highest closing level since April 2016.
“Last year there was so much capital outflow and speculation against the renminbi that the government had to implement these types of restrictions,” said the foreign bank executive. “But now that the renminbi has stabilised and is strengthening against the dollar, they are relaxing this.”
The previous rule on currency forwards, enacted in October 2015, required banks to place dollar deposits at the central bank worth 20 per cent of the value of contracts in which clients committed to sell renminbi and buy dollars at a future date.
Such forwards allowed bank clients to profit from renminbi depreciation or to hedge against depreciation risks arising from their main business. Chinese importers, who pay foreign suppliers in dollars using revenue earned in renminbi, typically use forwards to hedge. By raising the cost of forwards to banks and their clients, the central bank aimed to discourage their use.
“At the moment the market impact is pretty large, but it won’t change the basic exchange-rate trend,” said a senior foreign-exchange trader at a Chinese bank in Shanghai, who received the PBoC document on forwards. “The trade surplus is still continuing, while capital outflow has been staunched.”
The reserve requirement for offshore renminbi deposits, introduced in January 2016, similarly aimed to discourage short bets on the renminbi, by forcing offshore renminbi clearing banks to hold a portion of their offshore deposits on reserve at the PBoC.
The reserve requirement essentially locked up a portion of offshore renminbi deposits at these banks, reducing cash available for lending.
In a further sign of authorities’ more relaxed attitude to capital outflow, outbound acquisitions by Chinese companies have revived in recent months, especially those by state-owned enterprises. Authorities launched an aggressive crackdown on “irrational” outbound investment beginning late last year.
Still, traders and analysts say recent renminbi strength is due as much to the dollar’s global retreat as to Chinese policies. The dollar index, which tracks the greenback’s value against a basket of global currencies, hit a 33-month low last week.
Additional reporting by Jennifer Hughes in Hong Kong