Exclusive-China asks banks to restrict some Connect bond outflows

© Reuters. SUBMIT IMAGE: Paramilitary law enforcement officer stand guard in front of the head office of the People’s Bank of China, the reserve bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang

SHANGHAI/BEIJING (Reuters) -China’s reserve bank has actually asked some domestic banks to downsize their external financial investments through the Bond Connect plan, 2 sources with direct understanding of the matter stated, contributing to a number of current procedures focused on propping up the .

The window assistance from the People’s Bank of China (PBOC)appears to be focused on consisting of yuan streams into Hong Kong, and restricting the supply of yuan in overseas markets, the sources stated.

It is the most recent in a raft of current efforts to stem the yuan’s slide and comes as China’s monetary markets suffer losses and heavy outflows.

The assistance “could reduce mainland capital flowing out through the bond market,” stated Ken Cheung, chief Asian FX strategist at Mizuho Bank. “And it could also drive yields higher to support the renminbi.”

The southbound leg of the two-year-old Bond Connect plan permits mainland institutional financiers to acquire bonds sold Hong Kong.

“Restricting yuan from flowing to offshore market could tighten offshore yuan liquidity to raise the financing cost,” stated among the sources, who reckons the reserve bank’s relocation is a strike versus foreign yuan bears.

Both sources spoke on condition of privacy as they were not authorised to talk with the media. The PBOC decreased to discuss the material of the window assistance.

The instruction is the most recent in a volley of procedures China has actually required to protect a currency that’s been beaten down by a weak economy and capital outflows. The currency, which is down about 5% versus the dollar this year, struck a 10-month low of 7.3498 per dollar recently; it has actually considering that firmed to trade at 7.2865 on Friday.

Several procedures have actually been focused on raising the expense of shorting the yuan offshore.

China’s state-owned banks have actually taken actions to squeeze yuan today by mopping up money from the marketplace, other sources informed Reuters previously today. They began providing less to their peers, and after that they were seen actively trading sell/buy swaps in the forwards market to take in overseas yuan.

Increased yuan costs sales by China’s reserve bank in Hong Kong today likewise assisted tighten up liquidity in the overseas market to assist stabilise the yuan, a previous main lender stated.

The expense of remaining brief yuan, determined by short-term swaps, has actually soared to 5.55%, levels last seen 2 years earlier.

The PBOC has actually likewise been pushing banks to stop registering for Negotiable Certificates of Deposit (NCDs) provided by overseas banks, another action focused on reducing the quantity of yuan in Hong Kong markets.


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