China to scrutinise bulk dollar purchases

China’s central bank is tightening its scrutiny of bulk dollar purchases by domestic firms, three sources with direct knowledge of the matter said on Monday, at a time when the Chinese currency faces mounting depreciation pressure.

Companies that need to purchase $50 million or more will now need approval from the People’s Bank of China (PBOC), which convened a meeting with some commercial banks over the weekend on the matter, the sources said.

“The approval process will be extended,” said one of the sources. “The recent yuan depreciation has indeed been too severe, and many now expect the yuan to weaken beyond 7.5 per dollar.”

The central bank has warned some lenders of their huge dollar purchases on behalf of their corporate clients, according one of the other sources.

The directive is being issued as the Chinese yuan has declined by about 6% against the US dollar so far this year, falling to levels that were last seen during the 2008 global financial crisis.

The PBOC had no immediate comment on plans to increase its scrutiny of dollar purchases when contacted by Reuters.

China has in recent weeks stepped up its efforts to slow the pace of yuan declines by setting persistently stronger-than-expected midpoint fixings. Earlier this month, it announced it would increase the supply of dollars by lowering the amount of foreign exchange that banks must set aside.

Sources told Reuters last month that China’s currency regulators asked some banks to reduce or postpone their purchases of US dollars in order to slow the yuan’s depreciation. In the meantime, state-owned banks were seen selling dollars in both onshore and offshore markets and mopping up yuan liquidity in the offshore foreign exchange market to raise the cost of shorting the Chinese currency.

On Monday, China’s foreign exchange self-regulatory body said it would resolutely fend off risks of the yuan overshooting and pledged to take action when needed to correct one-sided and pro-cyclical activities, according to a statement published by the PBOC.

Published in The Express Tribune, September 12^th, 2023.

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