Chinese residents traded less foreign currency with the renminbi in the month of July. This means that there was a smaller forex surplus at the end of the month, something that has taken the broader markets by surprise.
According to a report published by the Chinese foreign exchange regulator, the State Administration of Foreign Exchange, and published in China’s ECNS newspaper, Chinese individuals and institutions sold 152 billion dollars (in US currency) of foreign currency for a total of 942 billion Yuan in July, and bought 152 billion dollars worth of foreign currency during the same time period.
The Chinese are restricted in the kinds of brokers that they can use. They use a different forex trading platform to the ones used in the Western world. Where westerners can choose from a plethora of trading software from different vendors, China is trialling a new system for worldwide trading for the first time since the restrictions on international money trading were put in place. In June, not long after the reform, trading volumes were stable. Most analysts had expected to see an increase in trading following the reform, so seeing the market slip is quite surprising. The reform relaxed foreign currency banking rules for Shanghai’s Free Trade Zone and the rest of the city, and should have facilitated deposits for more traders.
Platforms such as Meta Trader 4 and the trading tools provided by http://www.primetrade.com/trading-tools offer a huge range of options for western traders. The closed market of the Chinese economy is an interesting situation. The Chinese are restricted in the amount of foreign currency that they can purchase each year, which poses some interesting challenges for would-be investors. Some traders get around restrictions by asking friends and family to make purchases for them, while others set up companies abroad and use some creative invoicing to allow themselves to make the purchases in question. As of the 27th June, the People’s Bank of China removed the ceiling on interest rates for small currency deposits made by businesses and totalling less than $3 million The ceiling still exists for individuals, but if the initial trials are successful then the policy could be extended. There are several other financial policies in the Free Trade Zone, and the People’s Bank of China is slowly opening up the markets. They are testing one policy at a time to determine how those policies have an impact on the calculation of interest rates, with a goal of a much more open market.
The net surplus in forex has contributed to China’s foreign reserves. It is expected that China will sell 152.7 billion Yuan more foreign currency than it is currently buying through forward contracts. Whether this is a short-term blip or the start of a longer trend is uncertain. According to the data published by SAFE, foreign currency transactions in China weakened during July, with sales falling by 1.5 percent compared to the previous month, while purchases fell by 8.6 percent.