China cracks whip on foreign banks with forex shut-out

SHANGHAI/HONG KONG: Chinese authorities are starting to police the nation's foreign exchange market in a way currency traders have rarely seen before, levying penalty payments for aggressive trading and prompting some banks to turn down business.

China's central bank had suspended at least three foreign banks from conducting some of their foreign exchange business until the end of March.

China's past willingness to tolerate some capital flight has paved the way for locals to take billions from the country for funnelling into assets such as French vineyards and luxury properties in the world´s leading cities.

But with the country's growth at its weakest in 25 years and the currency heading for a record fall this year, China is aiming to stem the capital outflows, which can be exacerbated by the widening gap between onshore and offshore exchange rates for the yuan, or renminbi.

"China is essentially trying to close that gap and it´s much more difficult to do that if you have these outsiders coming in and taking advantage of the arbitrage," said Jimmy Weng, Hong Kong-based fund manager at Genesis Capital Investment.

China-based forex market sources said Beijing had turned up the pressure over the past few months following guidelines released in September to strengthen regulation of the market and make forex trades more expensive.

One foreign bank received a warning from the State Administration of Foreign Exchange (SAFE) regulator and was forced to increase money set aside for trades as a penalty in November due to its "aggressive" business model for forex operations, said a senior China-based banker in the FX team at a foreign bank.

The person's own bank had shut down buy-side forex trades.

"It's possible that the foreign banks did everything right, that they put aside the 20 percent reserve, that they met the ´know-your-client´ (KYC) requirements, but are still trading aggressively, which is clearly against what China wants," the person told Reuters.

"We used to make so much money from arbitrage - easy money you know? Now, none.

The latest move comes just three months after the People's Bank of China (PBOC) ordered banks to scrutinise clients' foreign exchange transactions to prevent illicit cross-border currency arbitrage between the offshore and onshore yuan.

On Wednesday, the country's foreign exchange regulator also said it would improve its reserve position and contingency plans to curb risks from abnormal cross-border capital flows.

"The main purpose is to crack down on excessive currency speculation and arbitrage, which may hurt the economy," said a senior economist at a think-tank linked to China´s Cabinet.

China's foreign exchange regulator said that it will step up checks on individuals' foreign currency buying, in the latest step to curb capital outflows.

The State Administration of Foreign Exchange will launch a new monitoring system on foreign exchange businesses at banks from the start of 2016 to prevent people from evading the official limits on currency buying, it said in a statement.

Individuals are now permitted to buy a maximum equivalent of $50,000 of foreign currency per year.