The move is meant to limit banks` scope to profit from a widening gap between the currency’s exchange rates at home and abroad, according to people with direct knowledge of the matter cited by the source. The clampdown comes as the growing offshore-onshore spread makes it profitable to buy the currency in Hong Kong and sell it in Shanghai.
The currency’s discount in Hong Kong’s freely traded market to its Shanghai rate reached a three-month high of 1.8% on 30 December 2015, before narrowing to 1.3% in late trading amid suspected intervention in the offshore market. The difference swelled to more than 2% following an August 2015 devaluation that spurred an exodus of funds from the world’s second-largest economy and yuan purchases to support the exchange rate contributed to a drop of more than USD 400 billion in China’s foreign-exchange reserves over the last 11 months.
The State Administration of Foreign Exchange said it will prevent risks associated with abnormal cross-border capital flows. The People’s Bank of China has ordered the suspension of liquidation of spot positions for clients, some services related to the cross-border as well as the onshore and offshore businesses.
The clampdown is a short-term market adjustment because the two prices will eventually converge and the authorities have already set a target of bringing this about by 2020.
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