Banks Ponder Unwinding of Hundreds of Billions in Currency Arbitrage

Banks are scrambling to find ways to lessen their risk to USD loans, a result of companies borrowing overseas in U.S. dollars and depositing money into domestic financial products.
21st Century Business Herald from Shanghai to more than bankers Department learned that due to the continued appreciation of the dollar since January, corporate dollar loans, including loan business within the warranty are affected. For export enterprises, because the high cost of long-term [USD] loans, currently less hedging instruments that can be used, each bank is actively studying response options.
A major risk is the hot money inflows created by companies who obtained U.S. dollar loans and invested in high yield RMB financial products:
According to its introduction, there are some companies to borrow dollars abroad, but held that the RMB assets, such as RMB financing products, or RMB investment projects, after the expiration sell RMB assets, into US dollars repayment. This is at a higher interest rate of RMB, US dollar interest rates low while the RMB exchange rate remained stable, and the rise of the situation, with arbitrage space. But in the devaluation of the RMB exchange rate and the volatility of the time, this formed the currency mismatch risk exposure.

"At present, more and more companies see to make adjustments. On the one hand, is to reduce the assets to RMB assets sold, or investment recovery, to return the dollar loans, so that the entire balance sheet of enterprises will decline, it should say is healthy. "The person said," Or, hard to deal with RMB assets in the short term, there is the dollar liabilities adjusted to RMB. "
One Chinese analyst estimates there's $700 billion looking to reverse this arbitrage trade.

It may already be too late for these speculators (who may still not think of themselves as speculators) because forward markets are already pricing in more devaluation. Additionally, as of October 2015, the margin requirement on long-term FX forwards is 20%.
According to "People's Bank of China on the long-term sale of foreign exchange to strengthen macro-prudential management notice", from October 15, 2015, to carry out long-term sales business of financial institutions (including financial companies) to be turned over to the foreign exchange risk reserves, reserve provisional rate of 20%.

"So, after this policy, we have a forward foreign exchange related to the structure of the product offer, we will deviate from the market price, for enterprises, long-term lock exchange or foreign exchange swaps now is not a good choice." There are joint-stock banks people familiar with the operations said.

In addition to the customer's foreign exchange funds, the bank also has a small part of their foreign exchange working capital.
Recent rules on foreign exchange, in addition to the bank's own needs, also make it difficult for banks to meet customer demands:
The aforementioned state accusing him who introduced the international business department, for the bank's own risk control, for any one currency, how many stay long or short exposure, are strictly controlled. Meanwhile, in terms of the funding line, long after there is an upper limit of foreign exchange settlement and sales control. This means that banks will not convert any of their own foreign exchange funds into RMB.
21st CBH: 银行:收紧美元负债,外汇衍生品工具缺乏

One of the reasons to expect some amount of chaos in the currency market was due to the long-term stability of the yuan. Recent volatility in the renminbi still pales in comparison to typical volatility between the yen, euro and U.S. dollar. Yet firms in those countries don't panic over every 5% fluctuation in the currency market because they aren't levered up, a direct result of that same volatility. A great amount of leverage built up in the Chinese financial system because arbitrage investors kept building up their pool of capital, confident in the stability of the yuan-dollar exchange rate. What took years to build will now rush to the exits as stability is replaced with volatility.

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