PBoC considers permitting commercial banks to participate in offshore yuan trade

On Tuesday, the People’s Bank of China (PBoC) mentioned that it is considering permitting onshore commercial banks to take part in offshore yuan trade. This is the central bank’s another action to internationalize the yuan and liberalize capital account while enhancing its influence in the offshore yuan market.

According to a research report of Scotiabank, the PBoC intends to integrate the offshore and onshore yuan FX markets and induce the offshore and onshore yuan exchange rates to “converge to parity in the future”.

The 2015 annual report of the central bank that was released yesterday, mentioned that China will urge for financial reforms including “two-way” opening of capital markets.  On 25 November 2015, the initial batch of overseas central banks began trading in China’s interbank foreign exchange market.

Moreover, market participants have comprehended that there is no point being concerned about the yuan collapse, making the path for PBoC to liberalize the country’s capital account. Since the start of May, USD/CNH spot has moved upward; however, the implied vol and risk reversal of the currency pair keep on declining.

Commercial banks, on behalf of their clients, have sold a net USD 1.32 billion in forward market in May. Meanwhile, a gradual implementation is expected of the considered policy as the PBoC favors an “orderly participation”, noted Scotiabank.

Separately, the PBoC has injected hundreds of billions of yuan in China’s financial system on Monday and Tuesday in order to avert a seasonal funding squeeze before the end of the first half of 2016. However, the pace of capital outflows has decelerated recently.