Depreciation of Yuan Triggered Currency Exchange Boom in the Chinese Mainland

Depreciation of Yuan Triggered Currency Exchange Boom in the Chinese MainlandThe fall of the renminbi to a five year low against the US dollar triggered a currency exchange boom in the Chinese mainland that forced the regulator to strengthen intervention that will ease capital outflow pressure. An increase in the number of people asking banks to change their Chinese currency into dollars was seen, and since last week they been buying more foreign currency denominated financial products using up heir annual currency exchange quota.

Based by a statement of the State Administration of Foreign Exchange, the country’s top foreign exchange regulator stated that mainlanders can exchange renminbi for a maximum amount of $50,000 annually for its equivalent in other currencies. SAFE has given guidance to mainland banks in controlling their dollar supplies and employees were told not to suggest foreign exchange products to their clients. The renminbi traded in the Shanghai based China Foreign Exchange Trade System fell by more than 1.5 percent against the dollar the largest decline since August last year as the People’s Bank of China and the central bank announced the foreign exchange rate reform.

Market watchers speculated that banks might tolerate faster depreciation of the renminbi and introduce a more flexible foreign exchange policy this year. as the rush to sell the renminbi increases capital outflow pressure that leads to a more irrational activity in the market. This pushed the central bank to stabilize the daily reference rate of the renminbi, which restricts onshore movements to a maximum of 2 percent rise or fall or at 6.5626 renminbi per dollar. Compared to the multiyear low of 6.5646 that triggered a halt to trading in onshore equity market for two days in the last week.

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