China gets tougher on renminbi speculation

New rules immediately cause renmnbi to fall against the US dollar.

Banks may now have to scale back their dollar loan books and increase their dollar deposits.

China's foreign-exchange regulator, the State Administration of Foreign Exchange, said the new measures are meant to stabilize the renminbi or yuan. It also wants to limit the size of banks' foreign-currency loans.

Speculators have been betting on the renminbi’s strength by taking out foreign-currency loans to invest in renminbi-denominated assets. Analysts said this practice was a key driver in recent foreign-exchange inflows into China.

Total foreign-exchange loans in the Chinese banking system have been increasing by an average of US$21 billion monthly since August after remaining fairly stable the previous three quarters.

SAFE's rules limit the banks' foreign-exchange loan-to-deposit ratios to 75% for Chinese banks and 100% for foreign banks. The foreign-exchange loan-to-deposit ratio for China's banking system as a whole is about 170%.

Chinese authorities remain concerned about bubbles forming in the country's economy. Beijing recently introduced restrictions to limit the growth of riskier investments known as wealth management products.