Two Potential Asian Financial Adjustments

Japan and China are contemplating adjustments international investors should note.

Japanese news wires are reporting that the BOJ and Financial Services Agency and financial services companies may be considering reducing the settlement period for Japanese government bonds to 2 days from 3 days. This is thought to reduce settlement risk. It is possible that this is a preliminary step on the way to one day settlement.

The second is that China is reportedly considering new controls on yuan forwards. SAFE, the State Administration of Foreign Exchange is reportedly consulting with local banks about potential new rules that are aimed at curbing speculation in the forward market. One of the possible policies would to raise the minimum requirement for a bank's fx holdings is its book was not short yuan (i.e. the bank had to supply more yuan than it was due). Currently banks must hold enough foreign currencies to meet its commitments at the end of every day. Apparently what is being discussed is the possibility that banks may have to hold more.

That could force banks to either take on more foreign exchange risk or reduce the forward sales of yuan.

Currently, Chinese banks cannot hold net short foreign currency positions at the close of business every day. This rule was introduced as the yuan appreciated in the 2005-2008 period. The new proposal would seem to require a new long foreign currency position.