PBOC policy extends Yuan intervention

3 September, AtoZForex.com, Lagos – Further steps are being taken to stabilize the markets, in the aftermath of the recent “Black Monday” stock sell-off. A troublesome experience in the global markets. In order to support the Yuan, the People’s Bank of China sets aside reserves to purchase all currency derivatives, making it more expensive to bet on depreciation of the Chinese currency.  As PBOC policy extends Yuan intervention with tougher rules to be implemented.

The rebound of “Black Monday” has left a long-lasting mark across the global markets. Hence, the Chinese authorities are taking measures to stabilise the volatile stock and Forex markets. According to a Reuters report, it stated that the People’s bank of China will commence with this move sometime in October.

Risks should not be overlooked

The move is a more optimistic approach to reduce the speculation and volatility after an unexpected Yuan devaluation, such was the case for the 11th of August. Reserve ratio on the currency market will be set at 20% of the nominal value of forwards and swap contracts. Also, it’s set at 10% of the nominal value of principal for options.

The pressure posed by depreciation may loose momentum, but it will also reduce the need for the Chinese central bank to sell foreign currency, in order to purchase Yuan. However, the risk should not be overlooked. In time past, overactive interventions have affected transaction volumes in negative way, which led international investors to loosing interest for holding Yuan. Last month, it marked the worst time period ever, as the Yuan edged down by 2.6% in August.

Disparity between onshore and offshore

During Wednesday late trade, the disparity between the onshore Yuan and offshore spot CNH extended to about 1,000 pips. The most prominent move since September 2011, which indicates that deeper depreciation should be expected by investors.

On Wednesday, China’s State Administration of Foreign Exchange (SAFE) set new directives, which soothes restrictions on multinational companies management of their foreign currency-dominated debt in China. Allowing debt to be pooled from their subsidiaries for central management.

Yesterday, in a separate move, the China Financial futures Exchange (CFFEX) stated that it would implement further measures to sort out excessive speculation in stock index future trading. Marking the second tightening rule in just a few days time by the CFFEX.

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