China simplifies foreign exchange rules

China has simplified rules governing the buying and selling of foreign exchange by banks, in a move to cut red-tape and give them leeway in managing risks.

Banks will have greater autonomy in foreign exchange transactions with companies and individuals, while the threshold for banks to enter the foreign exchange market will be lowered and approval procedures simplified, the People's Bank of China (PBOC), the central bank, said over the weekend.

The step is intended to "perfect the supervision system on banks' foreign exchange purchases and sales and safeguard the stable operations of the foreign exchange market," the PBC said.

China has the world's biggest pile of foreign exchange reserves, which hit a record $3.95 trillion at the end of March. Firms sells dollars to banks, which in turn sell most of them to the central bank in the interbank market.

Under the revised regulations published on the central bank's website, foreign exchange business of policy banks and big commercial banks will be approved by the State Administration of Foreign Exchange (SAFE), while that of other banks will be approved by the SAFE's branches.

The new rules will take effect on August 1.

Previously, currency business of policy banks, State banks and joint-stock commercial banks was required to have approval from both the central bank and the SAFE, the foreign exchange regulator.

When dealing in derivatives, banks must make sure their clients have real needs and are able to control risks, and banks must keep their positions with approved limits, according to the new rules.

The SAFE said on Thursday that it will increase the number of foreign exchange derivative products available in the market to facilitate export growth and help companies hedge currency risks.

It said in a statement on its website that it would strengthen supervision of derivatives trading by banks to ensure that the trade helps reduce risks for companies, and expand the variety of tools available, focusing on foreign exchange options.

The statement said it would add principal swap transactions for currency swaps and lower the entry threshold for companies and bank branches.

The SAFE has been moving to help Chinese firms cope with an increasingly volatile domestic exchange rate after the PBC set off a steep depreciation in the value of the yuan earlier this year, then followed up by widening the intraday trading band to 2 percent on either side of the official daily fixed rate.

That depreciation led to significant currency derivative losses by Chinese companies, in particular airlines, many of which had bet heavily on the yuan continuing to appreciate.