Exclusive: China asks banks to limit some Connect bond outflows

  • People’s Bank of China (PBOC) directs limits on Bond Connect heading south – sources
  • Sources: The movement saw the supply of offshore yuan shrink

SHANGHAI/BEIJING, Aug 25 (Reuters) – China’s central bank has asked some local banks to reduce their overseas investment through the Bond Connect plan, in addition to several recent measures aimed at supporting the economy, two sources familiar with the matter said. Chinese yuan.

The sources said the People’s Bank of China’s (PBOC) directive appears to be aimed at containing yuan inflows into Hong Kong and limiting the supply of yuan in overseas markets.

It is the latest in a raft of recent efforts to halt the yuan’s decline and comes as Chinese financial markets suffer significant losses and outflows.

Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank, said the directive “could reduce the flow of capital from the mainland through the bond market.” “It could also lead to a rise in offshore yuan yields to support the renminbi.”

The southern part of the two-year-old Bond Connect scheme allows mainland institutional investors to buy Hong Kong-traded bonds.

“Restricting the flow of the yuan to overseas markets may lead to a narrowing of the yuan’s liquidity abroad to raise the cost of funding,” said one of the sources, who believes the central bank’s move is a blow to foreign yuan speculators.

The two sources spoke on condition of anonymity because they were not authorized to speak to the media. The People’s Bank of China declined to comment on the content of the window’s guidelines.

The directive is the latest in a series of actions by China to defend a currency that has been battered by a weak economy and capital outflows. The currency, which has fallen about 5% against the dollar this year, hit a 10-month low of 7.3498 per dollar last week. It has since proven to trade at 7.2865 on Friday.

Many of the measures are aimed at raising the cost of shorting the yuan abroad.

Other sources told Reuters earlier this week that Chinese state-owned banks had taken steps to pressure the yuan this week by withdrawing funds from the market. They started out lending less to their peers and were then seen actively trading buy/sell swaps in the forwards market to absorb the offshore yuan.

A former central bank governor said the Chinese central bank’s increased sales in Hong Kong this week also helped tighten liquidity in the offshore market to help stabilize the yuan.

The cost of staying short the yuan, measured in short-term swaps, rose to 5.55%, levels last seen two years ago.

The People’s Bank of China (PBOC) also prompted banks to stop subscribing to negotiable certificates of deposit (NCDs) issued by offshore banks, another move aimed at reducing the amount of yuan in Hong Kong markets.

Reporting from newsrooms in Beijing and Shanghai. Writing by Vidya Ranganathan, Editing by Shri Navaratnam

Our standards: Thomson Reuters Principles of Trust.

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