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China bars banks in FTZs from some lending moves
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China has banned banks in its ground-breaking free trade zones from certain lending activities to ease pressure on the yuan in offshore markets, two sources with direct knowledge of the matter said yesterday.
The move comes after the yuan weakened against the dollar for nine straight weeks.
The curbs, announced by the Shanghai branch of the People’s Bank of China yesterday, have closed off channels used to deposit and lend yuan offshore through the FTZs as the currency plumbs 15-month lows, the sources said.
They prevent commercial banks from using some interbank accounts to deposit or lend yuan offshore through FTZ schemes, the people said.
The notice to banks said the measures followed significant recent volatility in the offshore yuan, and became effective yesterday.
The move was aimed at tightening offshore yuan liquidity and making it more expensive to short the Chinese currency, traders said.
The restriction on offshore yuan deposits and lending applies to some Free Trade Accounting Unit businesses, though it is not meant to affect cross-border capital flows that reflect real demand, according to the notice.
FTU businesses were introduced through financial reforms in the pilot FTZ in Shanghai, and are managed by Chinese banks separately from their ordinary domestic accounts.
Analysts and traders said the value of offshore yuan loans and deposits affected by the new restrictions is unclear.
The offshore yuan has fallen over 10 percent from late-March highs, while its onshore counterpart has fallen nearly 10 percent over the same period.
Several traders said news of the restrictions drove the offshore yuan higher yesterday, as market participants rushed to buy one-year forwards.
The curbs introduced yesterday are the latest in a series of moves by the PBOC to support the yuan, which has lost about 5.7 percent against the dollar so far this year.
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