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REPEAT: MNI Analysis:PBOC Reduces Risk Provision On Forwards

Repeats Story Initially Transmitted at 07:40 GMT Sep 11/03:40 EST Sep 11
     BEIJING (MNI) - The People's Bank of China (PBOC) has effectively
eliminated the foreign-exchange risk provision of currency forward contracts,
the Financial News, a publication under the PBOC, reported on Monday, with the
change taking effect immediately.
     The rule that had imposed a risk provision on currency forward contracts
was announced in 2015, when the yuan started coming under heavy depreciation
pressures. The rule demanded that financial institutions who take part in
forward buying and selling put aside a 20% provision in a PBOC account with a 0%
interest rates, which effectively raised the opportunity costs for investors
speculating on the depreciation of the yuan and also restricted dollar
purchases.
     The required risk provision now stands at 0%, although the PBOC could elect
to increase it again if the yuan were to come under pressure.
     According to the data from China International Capital Corporation (CICC),
the monthly trading volume of forward contracts dropped 83.2% when the risk
provision rule took effect in October 2015.
     The move by the PBOC to drop the risk provision apparently pointed its
worries over the suddenly strengthening yuan. 
     "The PBOC said in its second-quarter monetary policy report that it will
keep the yuan generally stable at a reasonable level, while the yuan has risen
too much against the dollar recently," Li Qilin and Zhong Linnan, analysts at
Lianxun Securities, said in a report on Saturday. "So the aim for lowering the
risk provision is to interrupt the trend of yuan appreciation and prevent the
expectations for the yuan to continue appreciating from growing too much."
     The yuan has strengthened rapidly against the dollar recently, hitting
6.4617 on Friday from 6.9057 on May 9. 
     The PBOC could be worried that investors are now universally betting on a
stronger yuan, pushing it to even higher levels.
     "I think the PBOC does not want to see one-sided yuan appreciation
expectations," a Shanghai-based forex trader at a commercial bank told MNI.
"Naturally, Chinese people need the yuan [as consumers] rather than the dollar.
So if appreciation expectations become stronger, more people will choose to sell
the dollars they have, pushing the yuan even higher."
     "Actually, the yuan fixing for the past two trading days has been weaker
than it should be, so the PBOC has begun to take action to prevent the yuan from
rising too fast," the trader continued.
     The PBOC set yuan fixing at 6.5032 and 6.4997 on Friday and Monday,
respectively, while the dollar index was 91.326 and 91.512.
     However, analysts said the latest PBOC move is more symbolic than
realistic, and that it is difficult to see the measure itself curbing the rising
yuan momentum.
     "Data suggested the volume of forex forward contracts is generally no
higher than 20% of that in the spot market, and Chinese companies do not have a
strong will to avoid exchange-rate risks by using financial derivatives," China
Construction Bank (CCB) said on Monday. "So the decrease in costs to buy forex
forward contracts will not necessarily stimulate the demands for forward
contracts."
     "Also, because of the fading yuan depreciation pressures, speculators do
not have the motivation to use forward contracts to bet on the depreciation of
the yuan," CCB said. "So the real effect might not be significant."
     Sun Guofeng, director general of the People's Bank of China's research
institute, said in an email to MNI on Monday that the PBOC's move was intended
to strengthen the price-discovery mechanism in the forex market. Sun also said
the yuan exchange rate is moving toward an even balance, and that market
expectations are becoming more rational.
     The PBOC also canceled the required reserves for foreign banks who
participate in yuan business abroad on the same day, the Financial News
reported.
     The yuan last traded at 6.5220 on Monday, significantly weaker than
Friday's close of 6.4617.
--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com
--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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