RQDII rules clarified
Currency swap ban can protect yuan: experts
Published: May 03, 2018 08:48 PM

An employee counts money in a bank in Taiyuan, North China's Shanxi Province. Photo: VCG

The central government is taking precautions against possible currency fluctuations in the future by forbidding domestic financial institutions from exchanging yuan for other currencies in offshore investment.

The People's Bank of China, the country's central bank, launched guidelines on Thursday saying that users of the Renminbi Qualified Domestic Institutional Investors (RQDII) program are not allowed to exchange yuan for overseas currencies when they conduct offshore investment.

The RQDII scheme allows domestic financial institutions, such as securities companies, to invest in yuan-denominated products (like yuan bonds) launched in offshore financial markets with yuan capital they own or collect domestically.

According to the guidelines, users of the scheme should report details such as capital source and scale, custodial banks and investment plans to the Shanghai branch of the People's Bank of China before they carry out offshore investment.

The guidelines also said that domestic trustee banks should strengthen supervision of whether the offshore investment is genuine and lawful.

Liu Jian, a senior research fellow at the financial research center under Bank of Communications, said that it could be hard for the government to track the usage of overseas currencies swapped with yuan by RQDII users.

"For example, the investors could use the overseas currencies to invest in local houses or hotels, which was banned by government regulations in August 2017," Liu told the Global Times on Thursday.

"Also, the government approved the RQDII program with the aim of widening the yuan investment scope. Offshore currency swaps clearly violate this intention," Liu noted.

Currency volatility

Xi Junyang, a finance professor at the Shanghai University of Finance and Economics, said the government is worried that yuan exchange in overseas markets might exert an impact on offshore yuan rates, which could then influence onshore yuan.

The central bank stressed the importance of managing cross-border financial investment at a time when the yuan is heading down against the US dollar. On Thursday the yuan's central parity rate against the US dollar stood at 6.3732, having weakened for four consecutive trading days and reaching the lowest level in more than three months.

But Xi said that although the yuan has weakened recently, it won't become a long-term trend.

"I believe the government is just taking precautions against possible abnormal fluctuations in the yuan in the future," Xi explained to the Global Times on Thursday.

Liu Xuezhi, a senior analyst at Bank of Communications, said that the current trade tension between the US and China might cause market investors to lose confidence, which might also trigger fluctuations in the yuan's exchange rate against the US dollar.

"The government is trying to look ahead to what might happen and make preparations by standardizing the yuan's outbound flow," he told the Global Times on Thursday.

In the first quarter of this year, domestic banks' settlement of exchange reached 2.76 trillion yuan ($435 billion) while banks sold 2.88 trillion yuan worth of foreign currency to individuals and companies, data from the State Administration of Foreign Exchange (SAFE) showed on April 19.

Wang Chunying, spokesperson for SAFE, said during a press conference on April 19 that the domestic foreign currency market continued to show balanced supply and demand in the first quarter.