China Aims to Cool Yuan’s Surge by Reducing Cost of Shorting

(Bloomberg) - China's policymakers have tried to stem a yuan rally by cutting rules that made betting against the currency expensive.
According to a statement by the People's Bank of China on Saturday, financial institutions will no longer have to set aside cash when buying foreign currency for customers through currency futures from Monday. Previously, banks had to hold 20% of sales on some currency futures contracts, a move imposed two years ago when the currency fell to 7 per dollar.
The yuan rose 1.6% on Friday when the currency first traded this month after the national holiday. While the move was in part a race to catch up with the offshore exchange rate, which continued to trade for much of the holiday season, there is little doubt that the yuan's gains have accelerated. The last quarter was the currency's best in 12 years.
The move by the central bank should cause bullish traders to be optimistic, at least for the time being. As early as September 2017, when the PBOC cut costs to zero after strong gains, the yuan plunged about 2.5% over the next three weeks. The move also shows how the PBOC continues to pull levers to sway the currency and undermine the yuan's potential as a haven.
The PBOC will remain flexible in the yuan exchange rate and stabilize market expectations, according to Saturday's statement. Officials will also generally keep the yuan stable at a reasonable equilibrium level, it said.
The yuan led the way among Asian peers for the past three months, up about 4.5% against the dollar. It closed at around 6.69 per dollar on Friday, its strongest level since April 2019. A recovering economy, a strong premium on sovereign debt over government bonds and the prospect of a victory for Democratic President Joe Biden as US president are providing a tailwind.
How far the authorities will go to limit the strength of the currency remains to be seen. The more influential signal will be seen on Monday when the PBOC sets its daily currency reference rate, according to Khoon Goh, head of Asia Research at Australia and New Zealand Banking Group Ltd. in Singapore.
Reserve requirements are typically lifted once there are no more concerns about currency weakness, he said. "The fixations will be a more important indication of whether authorities think the recent strength is too much," he said.
(Updates throughout.)
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