PBoC orders banks to tighten supervision on clients’ FX deals

Local media reported that PBoC orders banks to tighten supervision of their clients' FX deals. Fees for some banks to settle clients' FX deals in domestic market raised to as high as 0.3% (vs 0.002%-0.003% for most banks), as these banks are seen to help the clients to take advantage of the CNY-CNH spread. 

In the meantime, Chinese regulators requested all banks to check the background of the FX deals, and report any suspicious transaction immediately. This is another administrative measure to contain the market expectation of CNY deprecation, as Chinese authorities see a wide CNY-CNH spread will add pressure on CNY to weaken. 

However, it would be even more difficult to narrow the CNY-CNH spread, if the cross border arbitrage activities are prohibited. CNY-CNH spread narrowed to 227pips at the end of last Friday's trading session, but widened to 300pips again this morning, notes Commerzbank.