PBOC said to raise offshore yuan reserve requirement for clearing banks

The one-week and two-week yuan HIBOR rose to 11.9 percent and 12.745 percent, respectively.

Investors poured money into government bonds after the People’s Bank of China (PBOC) added the most cash through open-market operations since February last year, sending the yield on 10-year notes down to 2.7 percent. The PBOC has been attacking yuan bears on multiple fronts, from driving up offshore interest rates to undertaking intervention that cut the nation’s foreign-exchange reserves by an unprecedented $108 billion last month.

The required reserve ratio varies for Chinese lenders, and PBOC started to include mainland yuan deposits of offshore participant banks in reserve requirements previous year.

China’s central bank has been moving to depreciate the yuan methodically while trying to fight against heavy pressure from some traders to move the currency sharply lower.

Chinese authorities moved to tighten liquidity in the offshore yuan market on Monday, in what observers said amounted to a short-term move towards increased capital controls to deter speculation against its currency.

On Tuesday, the offshore yuan was trading 0.27 percent softer than the onshore spot at 6.5973 per dollar. Sterling was last up 0.1 percent at $1.4273.

The announcement comes as the yuan weakens on worries over a slowdown in the world’s second largest economy, which has caused a flight of capital and a widening gap in the offshore market, where investors are betting on further falls. Although it is conceivable that, like other what other central banks would have done, these are short-term measures meant to keep exchange rate market trading in an orderly fashion and not to veer too far away from fundamentals. The offshore yuan capped its biggest weekly advance since October after the central bank bought the currency in Hong Kong repeatedly.

“The exact impact depends on the flexibility of offshore participating banks in utilising the RMB that would otherwise be deposited at clearing banks, and also depends on how this extra cost is passed onto participating banks by the clearing banks”, said Cheung.

Compounding the challenge, are an overhaul of the central bank’s tool kit as monetary policy shifts to a price-based mechanism and the main liquidity lever is set to be used to enforce financial stability instead.

Xiao Gang, chairman of China Securities Regulatory Commission, said in a transcript of an internal meeting of the regulator that “some institutions let illegal and irregular activities ride instead of taking responsibility to stabilize the market”. “So when many traders didn’t see one, they just took profits”.