macroblog

« Was It Really That Bad? | Main | Bottoming Out? Part 4 »

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. 

October 29, 2006 in Asia, Exchange Rates and the Dollar | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef00d834f6b70769e2

Listed below are links to blogs that reference Oops! (Yuan Edition):

Comments

The likely rationale for the ban is to keep Chinese banks from profiting from the arbitrage between onshore(which reflect interest rate differentials) and offshore(which reflect foreigners' speculative demand for CNY) rates, and thus make speculation on CNY appreciation even mroe difficult for foreigners (as local banks won't be there to bid the USD that they sold onshore.) Click on my name for a bit more on the subject.

Posted by: Macro Man | October 29, 2006 at 11:45 AM

"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."
...skipping
"Without that "specific reason", interpretations of the ban are necessarily speculative. ..."

4 speculations are provided.

But to me the one that makes the most sense is not and that is the Chinese Central Bankers are preparing the way to allow the Yuan to float, i.e., removing speculators in their midst of the home currency.

Posted by: im1dc | October 29, 2006 at 06:52 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in