Price of Yuan Forwards Jumps 20%; 有黄金吗？

China has depreciated the value of the yuan again, by restricting its usefulness in financial transactions, raising the cost of hedging and speculating on currency volatility. These types of moves usually fail to stop the trend and this move only represents a small speed bump. Well worth paying if an investor or speculator expects further depreciation.

Bloomberg: China Orders Banks to Hold Reserves for Currency Forwards

The People’s Bank of China will impose a reserve requirement on financial institutions trading in foreign-exchange forwards for clients, according to six people familiar with the matter. The change, which takes effect on Oct. 15, will mandate a deposit of 20 percent of sales to be held at zero interest for a year, said the people, who asked not to be identified because they aren’t authorized to speak on the issue.

“It’s a move to ease the reduction in foreign-exchange reserves,” said Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong Ltd. “It’s also meant to discourage speculation and ensures the yuan’s rates are reflecting genuine demand and supply. That includes cross-border yuan investment into fixed assets.”

Reducing financial speculation is a noble goal, but it requires moving towards something like a gold standard. China controls the price of the yuan, but the structure of its own currency, like that of the global financial system, is a floating currency. The volatility cat is out of the bag and putting it back will be almost impossible.