Chinese Banks Gear up for Bigger Exchange Rate Swings

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Chinese banks are loading up on foreign currency with the expectation that Beijing will permit increased flexibility of the renminbi’s exchange rate.

Data from the People’s Bank of China indicates that depository corporations lifted their holdings of foreign exchange to 5.49 trillion yuan (USD$812 billion) in October, for an increase of 383 billion since the start of the year.

The increase comes as the yuan posts its best performance against the greenback since 2011, as the US Dollar Index falters and the Chinese central bank permits greater fluctuation in the exchange rate.

Expanding foreign exchange stockpiles will improve the ability of banks to satisfy demand for both overseas currencies as well as the yuan in the event that PBOC pushes through with greater exchange rate flexibility.

Over the past several years Chinese banks have consistently increased their foreign exchange holdings irrespective of exchange rate shifts. In 2016 depository corporations added 843 trillion yuan to their holdings, as the yuan plunged 6.5% against the US dollar. 

“It’s very necessary for the lenders to diversify their portfolios by holding a large amount of both the yuan and various overseas currencies,” said Shan Kun, head of local markets strategy in Shanghai at BNP Paribas to Bloomberg.

“If the yuan advances, they would buy more foreign-exchange at a lower cost; if the yuan drops, their foreign exchange hoard could make a profit.”

Outgoing central bank governor Zhou Xiaochuan recently flagged increased flexibility in future, hailing the benefits of yuan internationalisation in a recent People’s Daily opinion piece on the need for greater reform and opening of the Chinese financial sector.

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