PBOC “Declares War” on Short Sellers with Suspension of Shanghai Free-trade Accounting Unit System


The Chinese central bank has placed restrictions on commercial banks using free trade zones to deposit or lend renminbi funds abroad via certain types of interbank accounts, according to sources speaking to Reuters.

The sources said that the Shanghai branch of the People’s Bank of China (PBOC) announced on Thursday morning that the restrictions would apply to certain Free Trade Accounting Unit (FTU) businesses.

The new measure is intended to targets traders shorting the Chinese yuan by tightening offshore liquidity, with regulators stating that it will have minimal impact upon cross-border capital flows as required by China’s real economy.

FTU’s (上海自贸区分账核算单) are specialist, free trade accounting systems established by Shanghai financial institutions within their first-tier municipal entities for the purpose of undertaking investment, financing or exchange operations within the Shanghai Free Trade Zone.

FTU’s permit the provision of financial services to entities or overseas institutions within the Shanghai FTZ via free trade accounts, subject to real time monitoring by the Chinese central bank.

21st Century Business Herald reports that on the day that the Shanghai office of PBOC announced the restrictions, authorities also suspended the implementation of the “three net outflow equations” (三个净流出公式) that outlines conditions FTU accounts must satisfy in their daily operations.

One Hong Kong-based forex analyst said that the move is a sign of the Chinese central bank’s determination to prevent further declines in the yuan.

“This move by the central bank can be viewed as sending a signal that the fire wall will be lifted, to prevent the renminbi from ‘break through 7,'” said the analyst.

According to the analyst PBOC is “declaring war” on short sellers, adjusting market expectations, and seeking to forestall any systemic risk as well as fluctuations on Chinese capital markets that could arise should the renminbi fall past the 7 threshold.