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Monday, January 18, 2016, 16:22

Yuan firms with anti-speculation measure

By Agencies

SHANGHAI - China's yuan firmed on Monday as the central bank announced what appeared to be its latest attempt to deter offshore speculation in the currency, while stocks steadied close to levels last seen at the depths of last year's summer crash.

The People's Bank of China (PBOC) said it would start implementing a reserve requirement ratio (RRR) for some banks involved in the offshore yuan market, in a move that seemed intended to soak up additional liquidity.

PBoC decided to normally collect the reserve requirements on deposits placed by overseas financial institutions at their branches in the country from Jan 25, according to a statement released on Monday.

The overseas financial institutions do not include central banks and other similar agencies such as official reserve managements, international financial organizations, and sovereign wealth funds.

The PBOC set the reserve requirement ratio (RRR) for such institutions at zero in December 2014, but the ratio will now be "normalized."

The move will not affect domestic yuan liquidity, the PBOC said in the statement.

According to the statement, setting a normal RRR for overseas financial institutions will "help subdue cyclical movement of cross-border yuan funds and guide overseas financial institutions in strengthening their management of yuan liquidity".

The policy will increase the cost of short-selling offshore yuan and depress arbitrage based on the spreads of offshore and onshore yuan, according to China International Capital Corporation, a Chinese investment bank.

SQUEEZING SPECULATION

China's currency has fallen around 5 percent since August, and while most analysts expect further weakening the authorities have been loath to allow it to depreciate too fast.

Monday's move by the PBoC was seen by some as being - at this stage - more of a symbolic warning to banks, aimed at discouraging them from being too active in yuan dealings as part of its broader campaign to deter those betting offshore that the currency will fall.

Setting an RRR - requiring banks to hold a certain level of currency in reserves - could tighten liquidity leaving less yuan for banks to lend and so making it more expensive for speculators to bet against it.

On Friday, the yuan had weakened sharply offshore, opening up a gap of more than 1 percent with the steady onshore market.

China's central bank manages the onshore market by setting a daily target for the yuan, which is allowed to trade within a 2-percentage point band either side.

The spot market opened at 6.5800 per dollar on Monday and was changing hands at 6.5790 by mid-afternoon, 0.08 percent firmer than the previous close. The central bank had set a firmer tone by raising the mid-point to 6.5590.

The offshore yuan was trading at 6.5855 per dollar, around 0.1 percent softer than the onshore spot rate.

A senior dealer in Shanghai suggested that the RRR move "will help drain yuan liquidity offshore, and will dampen banks' interest in conducting offshore yuan business".

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