China has a message for currency speculators: the free lunch is over.
The People’s Bank of China has suspended at least two foreign banks from conducting some cross-border yuan business until late March, according to people with direct knowledge of the matter. The clampdown comes as the growing offshore-onshore spread makes it profitable for those who skirt capital controls to buy the currency at a discount in Hong Kong and sell it in Shanghai.
By closing loopholes in its regulations, China is trying to stabilize the yuan after a surprising revamp of its currency- valuation system in August led to capital outflows and prompted policy makers to tap US$213 billion ($300.3 billion) of foreign reserves to support the yuan. The risk is that discouraging arbitrage will cause the exchange rates to diverge further, undermining the goal of unifying the two markets.
“The market should see this as a warning shot across the bow,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co., a unit of the British inter- dealer brokerage Tullet Prebon Plc. Chinese regulators don’t want onshore trades to be speculative in nature and “in the short term this will likely lead to further widening of the spread,” he said.
A three-month ban on settling offshore clients’ yuan transactions in the onshore market was imposed Tuesday, the people said, asking not to be identified because they aren’t authorized to speak publicly on the matter. The central bank didn’t immediately respond to questions on the matter, and it was unclear how widely the ban has applied among foreign banks or which institutions are suspended.
Spokespeople for Citigroup Inc., HSBC Holdings Plc. and Standard Chartered Plc., which are among the largest foreign dealers allowed in China’s interbank foreign-exchange markets, declined to comment on the ban and whether their operations were affected.
The offshore yuan, which is freely traded overseas, touched a five-year low earlier Wednesday before erasing losses on speculation the government was intervening to support the currency. It traded at 6.5673 per dollar in New York, leaving it at about 1.2% cheaper than the rate in mainland China.
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The People’s Bank of China has suspended at least two foreign banks from conducting some cross-border yuan business until late March, according to people with direct knowledge of the matter. The clampdown comes as the growing offshore-onshore spread makes it profitable for those who skirt capital controls to buy the currency at a discount in Hong Kong and sell it in Shanghai.
By closing loopholes in its regulations, China is trying to stabilize the yuan after a surprising revamp of its currency- valuation system in August led to capital outflows and prompted policy makers to tap US$213 billion ($300.3 billion) of foreign reserves to support the yuan. The risk is that discouraging arbitrage will cause the exchange rates to diverge further, undermining the goal of unifying the two markets.
“The market should see this as a warning shot across the bow,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co., a unit of the British inter- dealer brokerage Tullet Prebon Plc. Chinese regulators don’t want onshore trades to be speculative in nature and “in the short term this will likely lead to further widening of the spread,” he said.
A three-month ban on settling offshore clients’ yuan transactions in the onshore market was imposed Tuesday, the people said, asking not to be identified because they aren’t authorized to speak publicly on the matter. The central bank didn’t immediately respond to questions on the matter, and it was unclear how widely the ban has applied among foreign banks or which institutions are suspended.
Spokespeople for Citigroup Inc., HSBC Holdings Plc. and Standard Chartered Plc., which are among the largest foreign dealers allowed in China’s interbank foreign-exchange markets, declined to comment on the ban and whether their operations were affected.
The offshore yuan, which is freely traded overseas, touched a five-year low earlier Wednesday before erasing losses on speculation the government was intervening to support the currency. It traded at 6.5673 per dollar in New York, leaving it at about 1.2% cheaper than the rate in mainland China.
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