Is China Restricting Foreign Banks X-Border Business?

The suspension of two foreign banks by the Chinese government from doing at least some cross-border business in yuan until at least March 2016 begs the question of whether the country is limiting cross-border transactions.

Bloomberg reported Wednesday (Dec. 30) that the three-month ban on offshore settlement of yuan transactions — set in motion by the People’s Bank of China (PBOC) — was verified by unnamed sources. The ban seeks to at least narrow the spread between exchange rates pegged to some currency transactions, such as the ones where banks buy yuan in Hong Kong and sell the currency in Shanghai. The spread in that example reached 1.8 percent earlier this week and then unwound a bit to a recent 1.3 percent.

[bctt tweet=”The ban seeks to at least narrow the spread between exchange rates pegged to some currency transactions.”]

In an interview with the newswire, Suan Teck Kin, a United Overseas Bank Ltd. economist, said: “Earlier, some banks were supposed to be penalized for engaging in arbitrage between the offshore and onshore markets. If the PBOC sees it’s a genuine trade, they’ll probably let you proceed. If they suspect you are manipulating, they want to clamp down. What they want to see is a natural convergence of the two yuan rates.”

The PBOC recently said that large volumes of currencies traded by foreign institutions would be allowed to trade in the offshore forex market. But the gap is likely to be monitored so that it does not go beyond certain levels that would hurt market sentiment. In further news, Bloomberg said the PBOC will not allow liquidation of what are known as “spot positions” for cross-border transactions. Suan said that the suspensions are short-term in nature, with a goal of bringing currencies closer, with less volatility, over the next few years.