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October 29, 2006
Oops! (Yuan Edition)
Trading expert, economic commentator, and soon-to-be newly-minted Chicago Exec-MBA grad Jeff Carter sent me a heads-up on this story, from Bloomberg:
China's State Administration of Foreign Exchange banned banks operating in the country from trading yuan derivatives in the offshore markets, according to a document issued to lenders.
"Without SAFE's approval, no institutions or individuals on the mainland can participate in outbound renminbi foreign- currency derivatives trading,'' the regulator said in the document dated Oct. 25 obtained by Bloomberg News. "Banks should provide to clients products and services to hedge renminbi currency risks within the business scope allowed by the regulator.'' A SAFE spokesman said he was unaware of the document.
Foreign banks use the offshore forwards market to make bets on the yuan and avoid restrictions placed on onshore trades by the central bank. Domestic banks have been using the offshore market to hedge positions...
The SAFE document referred to "the need to prevent China's economy from exchange-rate risks and facilitate designated banks for foreign-exchange businesses in providing currency-risk- hedging products and services.'' It gave no specific reason for the ban.
Without that "specific reason", interpretations of the ban are necessarily speculative. But the following seems like a reasonable set of possibilities: (a) The yuan peg is under some pressure; (b) The Chinese banking system remains in a precarious state; (c) The Chinese government is as determined as ever to slow the pace of yuan appreciation; (d) All of the above.
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