Chinese Banks Start to Restrict FX Services Amid Risk Concerns

State-owned lender Huaxia Bank has restricted some of its FX services amid regulatory concerns over yuan volatility.

Chinese banks are starting to suspend their foreign exchange services amid regulatory scrutiny on how they manage their FX exposures and use hedging tools.

SAFE (State Administration of Foreign Exchange) has reportedly been conducting a survey of banks and companies to ask about their risk management processes and ability to handle volatility in the yuan.

According to the SCMP, Huaxia Bank – a tier-one state-owned lender – had announced a partial suspension of its FX services, but later revised its position after attracting regulatory scrutiny.

Huaxia had initially said it would stop offering personal FX sales and purchases from 1 December “in response to changes in market conditions”, setting off a panic among customers who thought they would no longer be able to convert their yuan into foreign currencies.

The bank later removed the reference to “changing market conditions” and said instead that the temporary changes were due to the bank implementing “optimisation” upgrades.

Huaxia also clarified that it was halting the changing of freely convertible foreign currencies into other foreign currencies – such as buying US dollars in exchange for Japanese yen – but that the move would not affect the conversion of yuan into foreign currencies and vice versa.

Banks’ FX business is said to be under scrutiny because of expectations of potentially sharp currency volatility, as central banks wean economies off stimulus. Chinese regulators are concerned that significant investor losses could become a source of social instability.

Since the beginning of the year, more than 20 banks including ICBC, Postal Savings Bank of China and China Merchants Bank have made various adjustments to their personal FX and precious-metal-trading businesses.

The adjustments include suspending account openings, raising trading requirements, raising risk-tolerance standards, limiting position levels, and bulk agreement terminations.