China Allows Banks to Short Sell Dollars

The change comes into effect to coincide with the widening of the yuan's daily trading band to 1 percent, a landmark reform in the process to allow market forces a greater role in setting the value of the tightly-controlled Chinese currency that was announced on Saturday.

The move to allow banks to have negative positions in settlement and sales of foreign exchange is designed to promote price discovery of the yuan exchange rate, SAFE said in a statement on its website (www.safe.gov.cn).

China has said it wants more two-way price movements in the value of the yuan which policymakers say is close to its equilibrium value.

Banks with annual foreign turnover above $1 billion as of the end of 2011 will be allowed to short sell up to $10 million; those with annual forex turnover of $100 million-$1 billion are allowed to short sell dollars up to $5 million; and banks with forex turnover below $100 million are allowed to short trade dollars up to $3 million, according to SAFE.

China did not previously allow banks to short sell dollars except for the newly-established Bohai Bank in 2007 on an experimental basis.

Analysts say the reforms show Beijing's confidence that the yuan is moving closer to its balanced level. Beijing was reluctant to allow such trading when the market expectations were on one side.