The mainland has suspended at least two foreign banks from conducting some cross-border yuan business until late March, limiting their scope to profit from a widening gap between the currency's exchange rates at home and abroad, according to people with direct knowledge of the matter.

A three-month ban on settling offshore clients' yuan transactions in the onshore market was imposed on Tuesday by the People's Bank of China (PBOC), they said. The clampdown comes as the growing offshore-onshore spread makes it profitable to buy the currency in Hong Kong and sell it in Shanghai.

The currency's discount in Hong Kong's freely traded market to its Shanghai rate reached a three-month high of 1.8 percent on Wednesday. The difference swelled to more than 2 percent following an Aug 11 devaluation that spurred an exodus of funds from the world's second-largest economy, and yuan purchases to support the exchange rate contributed to a drop of more than $400 billion in the country's foreign-exchange reserves over the last 11 months.

"Earlier, some banks were supposed to be penalized for engaging in arbitrage between the offshore and onshore markets," said Suan Teck Kin, an economist at United Overseas Bank in Singapore. "If the PBOC sees it's a genuine trade, they'll probably let you proceed. If they suspect you are manipulating, they want to clamp down. What they want to see is a natural convergence of the two yuan rates."

The offshore yuan was last trading at 6.5760 a US dollar in Hong Kong and the rate in Shanghai was 6.4902, leaving a spread of 858 pips. The difference exceeded 1,200 pips on Wednesday before the offshore yuan erased a 0.5-percent loss in late trading.

(HK Edition 12/31/2015 page11)