September 18, 2015 / 7:11 AM / 4 years ago

UPDATE 1-China c.bank orders banks to tighten supervision of clients' FX deals - sources

(Adds detail, background)

HONG KONG/SHANGHAI, Sept 18 (Reuters) - The People’s Bank of China has ordered banks to closely scrutinise clients’ foreign exchange transactions to prevent illicit cross-border currency arbitrage, sources with the direct knowledge of the matter told Reuters on Friday.

China’s yuan is not freely convertible under the capital account, but some firms have made use of gray channels, such as via their overseas subsidiaries, to conduct arbitrage trading between onshore and offshore markets. Some have used bogus foreign trade deals to disguise speculative transactions.

Now the PBOC has raised its settlement charges for some banks but not others, suggesting the central bank was disciplining particular banks which helped their clients to conduct such arbitrage business.

“Several banks got the PBOC notices yesterday evening,” said one source, adding the “punitive” hike in trading fees reflected those banks’ excessive foreign exchange trading of late, which showed they were suspected of making illicit deals.

Another source said banks which were not “punished” this time might see their trading fees raised if they behaved improperly in the future.

The central bank did not immediately reply to a Reuters request for comment on Friday.

The PBOC unexpectedly devalued the yuan by nearly 2 percent against the dollar on Aug. 11, unsettling global markets as expectations of further yuan depreciation surged in the face of China’s sharp economic slowdown.

The PBOC has since greatly strengthened its intervention in trading to support the yuan and has implemented a range of preventive measures to curb capital outflows and cross-border arbitrage by Chinese banks and companies.

Beijing appears to have been so surprised by the global reaction to its abrupt currency devaluation that it is likely to keep the yuan on a tight leash in the near term to head off a currency war that could spark a broader financial crisis, policy insiders say.

On Thursday, the State Administration of Foreign Exchange, a unit of the central bank, said it would conduct checks on firms’ foreign exchange transactions to prevent speculation on yuan depreciation and intensify action against illegal cross-border money transactions.

It also said depreciation pressure on the yuan was “basically released” following August’s devaluation. (Reporting by Hong Kong newsroom; Writing by Lu Jianxin; Editing by Pete Sweeney and Eric Meijer)

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