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China will relax restrictions on banks' yuan trading from next year, in a small but significant move toward relaxing its capital controls.  The changes will replace daily caps on banks' foreign exchange positions with weekly limits, and for the first time establish unified standards for total foreign exchange positions that banks can hold.  The State Administration of Foreign Exchange published a set of new rules on Tuesday to simplify 14 sets of related regulations and add new provisions liberalizing banks' forex trading practices.  "The timing is well chosen," said a senior dealer at a major European bank in Shanghai.  "With the dollar strengthening globally and emerging market currencies suffering from lingering weakness, it is a good time to relax restrictions."

The yuan has lost 1.3 percent so far this month and looks set to close the year down 2.8 percent in the face of bearish pressure, which is expected to last well into 2015.  Starting Thursday, the SAFE will check banks' position compliance status each week, according to the rules published on the regulator's website, www.safe.gov.cn, leaving them leeway to short dollars within that period, traders said.  However, the SAFE appeared to discourage this interpretation in its statement.

"While banks manage their positions on a weekly basis, their average daily positions should be kept within the limits defined by SAFE," the regulator said, in what traders said was an apparent signal that banks should not go too far.  While position caps for shorting dollars will remain unchanged, the SAFE has published standards for total forex positions that will apply to everyone.

Banks previously needed to apply for quota individually.   All banks with less than $100 million worth of forex settlement business in the previous year will be allowed total positions of $50 million on average by the end of each day in a week, with a maximum short position value of $3 million, according to the new rules.  Those recording a value between $100 million and $1 billion will be granted total positions of $300 million and short positions of $5 million.

Those doing more than $1 billion of business can have total positions of $1 billion and short positions of $10 million.  "Those banks that cannot meet their business demand via the above-mentioned positions can apply to SAFE for additional quotas," the regulator said.

The rules also apply to China-based foreign banks; overseas lenders that have more than one office in China must appoint one key office to manage the positions, the rules said.