China Tightens Scrutiny on Bulk Dollar Purchases by Domestic Firms

Introduction

China’s central bank is increasing its oversight of bulk dollar purchases made by domestic companies, according to three sources familiar with the matter. The move comes as the Chinese currency faces growing depreciation pressure. Companies seeking to buy $50 million or more will now need approval from the People’s Bank of China (PBOC), which recently held a meeting with commercial banks to discuss the issue.

Extended Approval Process

As a result of this increased scrutiny, the approval process for large dollar purchases will be extended, as confirmed by one of the sources. The recent depreciation of the yuan has been significant, leading many to believe that the currency will continue to weaken beyond the 7.5 per dollar mark.

Warning to Lenders

According to one of the sources, the central bank has warned certain lenders about their substantial dollar purchases on behalf of their corporate clients. This directive is being issued as the Chinese yuan has already depreciated by approximately 6% against the U.S. dollar this year, reaching levels not seen since the 2008 global financial crisis.

Efforts to Slow Yuan Declines

In recent weeks, China has intensified its efforts to slow the pace of yuan declines. The central bank has been setting midpoint fixings that are consistently stronger than expected. Additionally, it announced a plan to increase the supply of dollars by reducing the amount of foreign exchange that banks must set aside.

Regulators’ Request to Banks

Last month, sources revealed that China’s currency regulators had asked some banks to reduce or delay their purchases of U.S. dollars. The objective was to slow down the depreciation of the yuan.

State-Owned Banks’ Actions

State-owned banks have been observed selling dollars in both onshore and offshore markets. They have also been absorbing yuan liquidity in the offshore foreign exchange market to raise the cost of shorting the Chinese currency.

Foreign Exchange Self-Regulatory Body’s Statement

China’s foreign exchange self-regulatory body stated that it will take decisive action to prevent the yuan from overshooting. The body pledged to correct any one-sided and pro-cyclical activities as necessary.

Conclusion

China’s central bank’s decision to tighten scrutiny on bulk dollar purchases reflects concerns about the depreciation of the yuan. The extended approval process for large purchases aims to mitigate the impact of the yuan’s decline and stabilize the currency.