Market News

(Bloomberg) -- China told some brokerage firms to reduce proprietary trading in the foreign-exchange market, according to people with knowledge of the matter, marking another step by the authorities to defend the beleaguered currency.

The People’s Bank of China asked several brokers earlier this week to reduce currency proprietary desk trading, without giving specific guidance on the limit of trading volume, the people said, declining to be named discussing private matters. Some of these firms have almost halted their own trading since then, the people said.

This adds to the other measures the PBOC has used, including verbal warnings and tightening offshore funding costs, to shore up the yuan, which had touched a 16-year low against the dollar. Trading volumes have dwindled as a result of both the window guidance and waning interest in going against a central bank which is bent on defending the currency.

The central bank didn’t immediately reply to a fax that Bloomberg sent seeking comments.

“The PBOC will have to keep liquidity loose and interest rates low to back the domestic economic recovery, rendering it hard to support onshore yuan via lifting funding cost” like in the offshore market, said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. “It will have to rely on outright spot selling via state-owned banks or other methods like refraining dollar buying via window guidance.”

The daily trading volume of dollar-yuan spot onshore declined to below $20 billion this week, according to official data. The onshore yuan has climbed 1.2% so far this week to around 7.26 per dollar after sliding to the lowest since 2007 in September.

While brokers trade less foreign exchange than banks, the latest step is another of the PBOC’s attempts to slow the yuan’s slide as it cuts interest rates. The authorities also earlier increased bill sales plan in Hong Kong to tighten offshore funding for the currency, which may squeeze short positions.

The central bank on Thursday said it will cut the reserve requirement ratio for most banks, as it steps up support for a stuttering economy. The currency has been weakening as China’s interest-rate differential widens against that of other major economies.

(Updates with chart, BI comment and background)