SHANGHAI: China's yuan had its most volatile day in nearly three months on Monday after authorities issued regulations limiting banks' long yuan positions as part of a campaign to crack down on hot money inflows.
Spot yuan fell by as much as 0.22 percent from Friday's in early trade on Monday, reaching a low of 6.1694 per dollar, but had recovered most of its lost ground by midday, as the market digested the new regulations.
The State Administration of Foreign Exchange (SAFE) released new rules late on Sunday tightening limits on long yuan positions that banks can hold for their own accounts.
The yuan slumped in early trade, despite a stronger central bank fixing, as dealers anticipated the new rules would require banks to buy dollars in order to comply with the new rules.
But the spot rate had largely recovered by midday. Traders noted that banks have plenty of time to adjust their positions gradually between now and end-June, when the new rules take effect. They also said that client demand for yuan remains strong.
The yuan has gained 1.2 percent in 2013, of which 0.9 percent has occurred since the beginning of April. Analysts and traders agree that heavy speculative capital flows have fueled this rise.
Traders say that in addition to strong demand from corporates betting on further yuan gains, banks have also accumulated proprietary long yuan positions in an effort to profit from the trend.
China ran a capital and financial account surplus of $102 billion in the first quarter, up from $20 billion in the fourth quarter last year, reflecting the heavy capital inflows.
Sunday's announcement from SAFE also contained new measures to crack down on hot money inflows disguised as trade payments.
Many analysts expressed skepticism about China's export figures for March, suspecting that unusually high exports to Hong Kong may reflect companies inflating their export invoices in order to skirt China's capital controls and convert more dollars into yuan.
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