SHANGHAI/BEIJING - China has released new rules to curb currency speculation amid signs that hot money inflows have helped push the yuan to a series of record highs in recent weeks.
The rules tighten limits on long yuan positions that banks can hold for their own accounts and aim to discourage firms from using dollar loans as a means to speculate on yuan gains.
Regulators will also increase scrutiny of exporters who channel money into the country disguised as trade payments, according to an announcement from the State Administration of Foreign Exchange on Sunday.
The changes suggest that "a level of tolerance over the nature of RMB appreciation has been breached", Mr Paul Mackel, head of Asian FX at HSBC, wrote in a note to clients yesterday, referring to the Chinese currency by an alternative name.
The yuan has gained 1.2 per cent this year, of which 0.9 per cent has occurred since the beginning of last month.
Analysts and traders agree that heavy speculative capital flows have fuelled this rise.
The move should make foreign-currency loans more expensive, as the rules incentivise banks to set aside more forex deposits against their loans. Onshore forex deposit rates may also rise, as banks try to attract more deposits.
"A lot of the RMB's recent strength has come from onshore, where domestics have been borrowing more in foreign currency and holding more assets in RMB," wrote Mr Mackel.
"We have felt that these flows were adding to the hot money inflow pressures," he wrote.
Firms that earn revenue in yuan prefer to borrow in dollars if they expect the yuan to rise, because the loan becomes cheaper to repay in yuan terms.
Forex loans outstanding rose by 10 per cent in the first three months of this year, official data shows. The system-wide forex loan-to-deposit ratio (LDR) stood at 171 per cent at end-March. That suggests most banks will be subject to the new rules.
China ran a capital- and financial-account surplus of US$102 billion (S$126 billion) in the first quarter, up from US$20 billion in the fourth quarter last year, reflecting the heavy capital inflows.
In addition to strong demand from corporates betting on yuan gains, banks have also accumulated proprietary long yuan positions in an effort to profit from the trend, foreign-exchange dealers say.
Policy banks such as China Development Bank, as well as banks whose forex LDR is already below the reference rate, are exempt from the new regulations.