China Urges Major Banks To Gradually Adjust Dollar Purchases: Report
China's central bank has reportedly issued informal guidance to some of the country's major lenders, urging them not to immediately offset their foreign exchange positions in the market. Instead, they have been advised to maintain open positions for a certain duration to help alleviate downward pressure on the yuan, according to sources familiar with the matter.
Under this guidance, banks are instructed not to square their positions in the inter-bank foreign exchange markets following any U.S. dollar sales to clients, until their spot foreign exchange position reaches a specified level. Most banks are permitted to hold a net short or long foreign currency position in the spot dollar-yuan markets, subject to defined limits.
Effectively, this directive means that a portion of the substantial dollar purchases made by companies will be absorbed by banks and temporarily remain on their balance sheets, thereby mitigating some of the downward pressure on the depreciating yuan.
The guidance was conveyed during a meeting between the People's Bank of China (PBOC) and select commercial banks earlier in the week, according to the sources. Additionally, banks were informed that companies seeking to purchase USD50 million or more will require approval from the central bank, as reported by Reuters.
China's yuan has experienced a decline of over 5 per cent against the U.S. dollar since the beginning of the year, with a trading rate of 7.2735 per dollar as of Thursday. This performance has positioned it as one of Asia's weakest-performing currencies in 2023.
The People's Bank of China (PBOC) has not provided an immediate response to a media house's request for comment on this matter.
