The State Administration of Foreign Exchange (SAFE), China’s foreign exchange regulator, announced today that it will allow banks to issue more FX-related products for risk-hedging purposes. This will include allowing banks to hold bigger short-dollar positions at the end of the day, according to a statement on its website.
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SAFE, which is responsible for drafting rules and regulations governing foreign exchange market activities and managing the state foreign exchange reserves, announced the move as part of the Chinese government’s plans to create a more open economy, while implementing a policy of more rigorous inspections of foreign exchange businesses as previously reported by Finance Magnates.
SAFE said the change would help maintain onshore liquidity of foreign currency while reducing exchange rate risk. The adjustment comes as the yuan remains under depreciation pressure as Beijing remains in a monetary easing stance while the U.S. Federal Reserve contemplates raising rates, which would further support the dollar. This provides policy space for SAFE to allow banks more latitude shorting the dollar.
The regulator said that China will further step up monitoring of trade-related investment since trade transactions have in the past been used as a mechanism to conceal capital inflows and outflows.