Exclusive – China FX regulatory body proposes cap on banks’ prop trading

FILE PHOTO: Chinese Yuan banknotes are seen in this illustration
FILE PHOTO: Chinese Yuan banknotes are seen in this illustration taken February 10, 2020. REUTERS/Dado Ruvic/Illustration

November 19, 2021

SHANGHAI/BEIJING (Reuters) – A central bank-led self-regulatory group that helps to oversee China’s foreign exchange industry has asked commercial banks to cap the size of their proprietary trading accounts, five sources with direct knowledge of the matter said on Friday.

One of the sources said the aim was to limit financial institutions’ speculation on the yuan when the Chinese currency has been strengthening.

Beijing is keen to protect its export sector as domestic demand and economic growth momentum show signs of slowing.

Market observers said the request was the Chinese regulatory bodies’ latest attempt to stabilise the exchange rate and may not be the last.

“They will find ways and other measures to thwart the market’s ability, capacity and willingness to go long renminbi,” Stephen Jen, who runs hedge fund Eurizon SLJ Capital, said.

He noted the yuan in trade-weighted terms was the strongest performing currency in recent months, outpacing even the U.S. dollar.

China’s Foreign Exchange Market Self-Discipline Mechanism is a committee of central bank and commercial bank representatives that is supervised by the People’s Bank of China (PBOC).

It has told banks that if the volume of their proprietary trade rises 50% from a year earlier or exceeds 15 times the amount they execute on behalf of their clients, their businesses will be further analysed and investigated, said the sources, some of whom were told of the plan via email.

The sources from within some of the banks spoke on condition of anonymity as they were not authorised to discuss the issue in public. There was no mention of any effective date for the measure.

The regulatory body said in a statement late on Thursday that Chinese financial institutions should actively provide currency hedging services for companies, but they should not help companies speculate in currencies.

China’s financial regulators have urged companies to protect themselves against currency risks as the central bank gradually loosens its control of the yuan, but are struggling to convince local businesses to hedge https://www.reuters.com/business/chinas-regulators-struggle-sway-companies-currency-risk-2021-06-22.

China’s tightly-managed currency has risen by nearly 3% against the U.S. dollar since March, even as the dollar rose against most other currencies.

Market analysts and economists attributed the yuan’s strength to China’s growing trade surplus – generated in part by an export boom during the pandemic – steady capital inflows and a glut of dollars in the banking system.

With authorities keen to attract international investment into Chinese stocks and bonds, keeping the exchange rate steady also helps ensure confidence among foreign investors, analysts say.

Eurizon SLJ Capital’s Jen said the success of past Chinese measures to arrest yuan strength was “ambiguous” in the short run, but they eventually worked longer term.

(Reporting by Shanghai and Beijing bureau; Additional reporting and writing by Tommy Wilkes in London; Editing by Vidya Ranganathan, Elaine Hardcastle and Barbara Lewis)