China's central bank has taken steps to limit cross-border yuan trading by several foreign banks until the end of Q1 2016, according to reports from Bloomberg and Reuters.
The move by the People’s Bank of China will curb the arbitrage opportunities created by a widening gap in the yuan's foreign exchange rate in Hong Kong and Shanghai. Specifically, the ban stops the banks from settling offshore clients’ yuan transactions in the onshore market, seeing as the growing offshore-onshore spread now makes it profitable to buy the currency in Hong Kong and sell it in Shanghai.
In August 2015, the Chinese government devalued the yuan and the onshore-offshore spread has been growing since then. The suspension is seen as a move to limit yuan volatility and control the difference between onshore and offshore FX rates. The government aims to converge the two exchange rates by 2020.
Suan Teck Kin, an economist at United Overseas Bank in Singapore, told Bloomberg: “Earlier, some banks were supposed to be penalised for engaging in arbitrage between the offshore and onshore markets. If the PBOC sees it’s a genuine trade, they’ll probably let you proceed. If they suspect you are manipulating, they want to clamp down. What they want to see is a natural convergence of the two yuan rates.”
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