Policy can limit speculative yuan trading: expert
The People's Bank of China (PBOC), the central bank, issued an announcement on Monday requiring offshore financial institutions to submit a "normal" level of reserves from their onshore deposits starting from January 25.
Experts noted on Monday that the policy aims to stabilize the yuan's offshore markets.
The reserves are the amount of money financial institutions have to leave with the PBOC as part of the reserve requirement ratio (RRR).
Offshore financial institutions were not bound by the RRR until December 2014, but the RRR they had to submit has been set at zero until now.
The announcement said that offshore institutions will now have to submit a "normal level" of RRR, without specifying exactly what that level would be.
The rule does not apply to offshore central banks or international financial organizations, the PBOC statement said.
Controlling offshore trading
The aim of the policy is to lead overseas financial institutions to strengthen their management of yuan liquidity, to prevent financial risks and maintain financial stability, according to the PBOC statement.
Xi Junyang, a professor with the Department of Finance at the Shanghai University of Finance and Economics, told the Global Times on Monday that the new RRR rule will guarantee that banks maintain their loan repayment capacity.
"Some banks might use too much of their deposits in their lending business, and if they can't recover their loans, their depositors could have problems getting their money back. In this sense, it's appropriate that the RRR regulations are applied to both domestic banks and offshore banks that operate in China," Xi noted.
It is also believed that another aim of the policy is to limit offshore speculative trading of the yuan.
"By imposing deposit reserve requirements on offshore banks' onshore deposits, the PBOC decreases those institutions' ability to provide money to offshore speculative investors, which can control the level of currency dumping in the offshore markets," Xi noted.
Song Fengming, director of the Department of Finance at Tsinghua University, told the Global Times on Monday that the reason why offshore banks were exempt from the deposit reserve rules in the past might have been because the central government wanted to encourage them to launch businesses in China.
But as the yuan has become more internationalized and the currency's offshore exchange rate has seen more violent fluctuations, rolling out measures to control currency supply has become more urgent, he noted.
In early January, the offshore yuan exchange rate weakened to its lowest level in nearly five years, on fears that China was preparing to allow a sharp depreciation in its currency to help boost the domestic economy, Reuters reported on Monday.
The PBOC has managed to prop up the offshore yuan in recent weeks through measures to tighten offshore liquidity, the Reuters report said.
The offshore yuan rate surged on Monday. By 17:53 pm, the spot offshore yuan rate was 6.5792 against the U.S. dollar, according to data from UK-based website exchangerates.org.uk.
Onshore liquidity unaffected
The PBOC said that the new policy is an improvement to the existing deposit reserve mechanism, and wouldn't affect onshore yuan liquidity.
The PBOC said it would use various monetary policy tools to keep banks' liquidity at a "reasonable" and "adequate" level.
Following a round of depreciation that started in late December 2015, the yuan has shown signs of stabilizing, with the currency's central parity rate holding steady in recent days.
The RRR is considered a powerful method for managing money supply, as a higher level tightens liquidity and a lower level means loosening of credit controls, according to Xinhua.
