SHANGHAI/BEIJING: China's central bank has ordered banks conducting yuan/dollar trading on the domestic foreign exchange market to abide by restrictions limiting the currency's daily trading range, traders told Reuters on Monday.
Spot yuan transactions are typically settled two days after the trade is completed, in a procedure known as T+2.
Such transactions are subject to the central bank's daily trading limit, which allows the dollar/yuan rate to diverge by no more than 1 percent on either side of the midpoint that the central bank sets each morning.
But the yuan has repeatedly hit the upper limit of this band recently, prompting banks to invent new methods of trading aimed at circumventing the limit. In particular, banks began conducting trades for settlement in the same day or one day after, known as T or T+1, traders said.
These alternative products have long existed but were rarely used and are not officially designated as spot yuan trades by central bank rules. That loophole enabled banks to quote the yuan outside the 1 percent range in recent days, traders said.
The People's Bank of China (PBOC) issued a notice on Monday ordering banks to quote within the 1-percent limit, even for T or T+1 trades, traders said.
"With T and T+1 settlement ordered to be included in the one-percent limit, liquidity has been even poorer today," said a trader in a foreign bank in Shanghai.
Spot yuan has hit its top-side limit for 25 of the last 28 sessions, and liquidity has suffered as few banks have been willing to bid for dollars in the permitted price range.
The PBOC was could not be reached for comment on Monday afternoon.
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