Restrictions on yuan exchange spark jitters
STORY: BEIJING is restricting the conversion of foreign
currencies into yuan, a move that briefly sparked jitters across
the region yesterday that the yuan might be devalued.
An advisory to foreign banks from the mainland's top
commercial bank Bank of China (BOC) said their branches in
the mainland and Hong Kong will be restricted from 10 June
from converting foreign currencies into yuan.
Shockwaves spread through Asian stock markets and
currencies until Beijing offered assurances that it has no plans
to devalue the currency.
The BOC move is apparently meant to close a loophole that
currently gives foreign banks access to renminbi offshore,
effectively creating a small hole in the mainland's capital
account.
Foreign banks can exchange until now up to 100,000 yuan for
foreign currencies although transactions are limited to buying
yuan and they were restricted from selling yuan.
``My impression is the Chinese government wants a tighter
grip on the yuan business. I heard people say this measure is
in preparation for a devaluation, but I can't see what the BOC
preventing the conversion of foreign currencies into yuan
have to do with a possible devaluation,'' said an Asian banker.
A currency dealer, who claimed to have spoken with some
BOC executives, said the move was aimed at curtailing the
outflow of yuan from the mainland. Worries have grown that
an undetermined amount of yuan outside the mainland is now
funding illicit businesses in Hong Kong and could be used in
future to speculate against the yuan. The yuan at the moment
can be bought at a cheaper rate of 1.15 to a Hong Kong dollar
in the SAR than the official rate of 1.08.
This gap could widen if yuan outflow remains unchecked,
another dealer said.
A tightening of foreign exchange regulations, just like
Malaysia did last year, would make it more difficult to
speculate against any currency.
``If you collect a considerable amount of yuan offshore and
sell it to the BOC, you can make money. So the BOC doesn't
want to buy from people who have arbitrage opportunities,''
said the dealer.
But a major downside of a closed foreign exchange market is
that it makes doing business in the mainland less convenient.
``Everybody in need of yuan will have to go through the
BOC,'' he said.
``Lots of small businesses will suffer from red tape when
dealing with the BOC.''