China’s government or the PBOC moved to suspend three foreign banks from participating in cross-border currency transactions. From what I have seen, and nothing has been confirmed, rumors have suggested that Deutsche Bank (DB) was one of the three. The move has, as usual, created all manner of confusion in how to frame what the PBOC or Chinese regulators might be attempting. Recall that August’s great “devaluation†was supposed to be exactly that, an intentional “stimulus†of sorts to devalue CNY against the dollar to regain export expansion.
Since then, the PBOC’s various moves, of which there have been many, don’t seem to align with devaluation tactics. The suspension of banks in the “carry trade†between onshore and offshore CNY and CNH is yet another example.
By closing loopholes in its regulations, China is trying to stabilize the yuan after a surprising revamp of its currency-valuation system in August led to capital outflows and prompted policy makers to tap $213 billion of foreign reserves to support the yuan. The risk is that discouraging arbitrage will cause the exchange rates to diverge further, undermining the goal of unifying the two markets.
From devaluation to now “stabilizing the yuanâ€, the PBOC has caught currency observers in competing narratives. Here’s another:
The spread between the onshore and offshore markets for the yuan, or renminbi, has been growing since the devaluation, making it increasingly difficult for the central bank to manage its currency and stem an outflow of capital from an economy that is facing its slowest growth in 25 years.
The sources told Reuters that authorities had warned the banks that if they engaged in lucrative carry trade, taking advantage of the different exchange rates, the central bank would move to further block arbitrage channels.Â
“This is part of the PBOC’s expedient means to stabilize the yuan’s exchange rate,†said an executive at a foreign bank contacted separately.
