China's central bank has asked some of the country's biggest lenders to refrain from immediately squaring their foreign exchange positions in the market, and to run open positions for a while in order to alleviate downside pressure on the yuan, two sources with knowledge the matter said.
As part of this informal "window guidance", banks have been asked not to square their positions in the inter-bank foreign exchange markets after any U.S. dollar sales to clients, until their spot foreign exchange position hits a certain level, the sources said.
The move would effectively mean some of the heavy dollar purchases by companies would be absorbed by banks and sit on their books for a while, thus partially reducing downward pressure on the sliding yuan. The sources, who received the directive, said banks were also told to encourage their clients to hold off on dollar purchases.
"The source of the weakness in renminbi is very simply that interest rates in China are low, that activity in China is slow, therefore the rate of return of marginal capital invested in China is not as great as elsewhere, and therefore that impacts capital flows," said Sid Mathur, head of Asia-Pacific macro strategy and emerging market research at BNP Paribas.
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