China may change reserve requirement on yuan forward settlement - sources

SHANGHAI/BEIJING, July 27 (Reuters) - China's foreign exchange regulator is considering adjusting or scrapping reserve requirements for financial institutions settling foreign exchange forward yuan positions, two sources with direct knowledge of the matter said on Thursday.

Under current rules, financial institutions must set aside 20 percent of the previous month's yuan forwards settlement amount as foreign exchange risk reserves.

The State Administration of Foreign Exchange (SAFE) has consulted with several commercial banks on the plan, the sources said.

"Market expectations have changed, expectations for a strong dollar is no longer so strong now. So it's a good timing (to make changes to the current policy), and it might be hard to have such a weak dollar again," one of the sources said.

Another source said the impact on the foreign exchange market was likely to be limited even if the authorities planned to scrap the reserve requirement, adding that the plan is not finalized.

The central bank and SAFE have yet to respond to Reuters' requests for comment.

China's cross-border capital flows stabilized in the first half of 2017 as market expectations for yuan depreciation eased due to broad weakness in the U.S. dollar.

The reserve requirement rule on trading foreign exchange forward positions was designed to shore up the Chinese currency and make it costly for market participants to bet on swings in the renminbi.

China started to implement requirements for foreign firms to settle foreign exchange forward yuan positions in the onshore market in August last year.

A similar requirement for domestic financial institutions was applied in late 2015. (Reporting by Reuters Newsroom; Editing by Jacqueline Wong)