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People's Daily Online>>China Business

Banks open to shorting dollar

By Wang Fei’er (Global Times)

08:33, April 18, 2012

China's banks will be permitted to hold overnight long positions in the yuan, a move that also allows them to short sell dollars, according to an announcement made late Monday by the State Administration of Foreign Exchange (SAFE), the nation's foreign currency regulator.

This move shows the government's confidence that the yuan is balancing, and reinforces China's commitment to allowing market forces to sway the price of the nation's government-capped currency, experts told the Global Times.

Forbidding banks, major participants in the foreign currency market, from short selling dollars reduced supply and demand pressures on the yuan, which allowed the government to control its price more easily in the absence of market dynamics, Chen Xuebin, deputy director of the Institute for Financial Studies at Fudan University, told the Global Times.

But when China stopped pegging the yuan against the dollar in July 2005, this put pressure on Beijing to stave off the yuan's appreciation, as allegations that the yuan was undervalued were rampant in the world's major economies at the time, Chen said.

The slowdown of China's economic growth and the slump in the country's once mammoth trade surplus has lent credence to Beijing's argument that the yuan is not undervalued, and has taken some of the pressure off the yuan's appreciation, said Xue Zhaofeng, chairman of Peking University's Institute of Law and Economics.

"This is the right moment for the country to free up control of the yuan's price because the two-way volatility of its price has made investors less likely to profit from yuan appreciations," added Xue.

According to SAFE's announcement, banks with annual foreign exchange turnover above $1 billion last year will be allowed to short sell a maximum of $10 million; those with annual forex turnover between $100 million and $1 billion are entitled to short positions of dollars up to $5 million; while banks with turnover below $100 million can short sell up to $3 million.

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