Exclusive: China’s regulators tighten scrutiny of FX dealers

SHANGHAI (Reuters) – China’s regulators are tightening control over the inner workings of its currency market, pressuring banks to trade less and in smaller ranges, two banking sources told Reuters, as part of a sweeping push to curb speculation.

The moves follow recent efforts at curtailing financial risks that include dampening commodity price rises, banning cryptocurrency transactions and restricting property speculation. And they bring the campaign deeper into day-to-day operations on the dealing desks of a $30 trillion market.

It is also the latest example of scrutiny focused on foreign exchange, which analysts said might be aimed at tightening the leash on the yuan at a sensitive time when U.S. policymakers prepare to withdraw monetary stimulus and China seems poised to add more.

Reuters reported https://www.reuters.com/world/china/exclusive-china-brokers-drop-yuan-forecasts-avoid-regulators-ire-2021-09-15 earlier in September that brokers have dropped currency forecasts following regulatory pressure and reports the scrutiny of the interbank market for the first time. Authorities have also been hinting that banks and companies should prepare for volatility.

In recent months many banks have also withdrawn individual FX trading products, closing another avenue for speculation.

Recently, representatives of China’s State Administration of Foreign Exchange (SAFE) have embedded themselves on currency trading floors from commercial banks to major state-owned lenders, said the two sources at separate market-making banks.

They said the officials stayed for months, far longer than supervisory visits previously, and urged them to price customer deals faster and in tighter ranges, or spreads.

The bid-ask spread is the difference between the price the bank charges clients and price in the market, so narrowing it reduces trading banks’ profit. It could also help hem the yuan in a tighter trading range, but at the same time moves risk from customers to the bank while a deal is being executed.

One source said the regulator reminded them their role is to keep things steady or “smoothen fluctuations without pushing the yuan to either side”. They added that regulators had not visited foreign banks this year. Banks in Hong Kong do not participate in China’s onshore interbank market.

The other source said they were told to cut volumes to reduce the turnover of interbank trades – once a badge of honour for so-called market makers who provide liquidity to each other and the wider trading pool.

“(Now) you get calls from regulators if you trade too much,” he said. Both requested anonymity as they are not authorised to talk to the media about the matter.

SAFE told Reuters by fax it has “always supported” market participants in trading “reasonably”, and to promote the integrity, fairness, order and efficiency of the foreign exchange market.

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