(Repeats story with no changes)
* Beijing targets "aggressive" trading to stem capital flows
* Also wants to narrow onshore-offshore yuan gap
* China-based banker says "easy-money" arbitrage days now gone
By Engen Tham and Denny Thomas
SHANGHAI/HONG KONG, Dec 31 (Reuters) - Chinese authorities are starting to police the nation's foreign exchange market in a way currency traders have rarely seen before, levying penalty payments for aggressive trading and prompting some banks to turn down business.
Reuters reported on Wednesday that China's central bank had suspended at least three foreign banks from conducting some of their foreign exchange business until the end of March.
China's past willingness to tolerate some capital flight has paved the way for locals to take billions from the country for funnelling into assets such as French vineyards and luxury properties in the world's leading cities.
But with the country's growth at its weakest in 25 years and the currency heading for a record fall this year, China is aiming to stem the capital outflows, which can be exacerbated by the widening gap between onshore and offshore exchange rates for the yuan, or renminbi.
"China is essentially trying to close that gap and it's much more difficult to do that if you have these outsiders coming in and taking advantage of the arbitrage," said Jimmy Weng, Hong Kong-based fund manager at Genesis Capital Investment.
China-based forex market sources said Beijing had turned up the pressure over the past few months following guidelines released in September to strengthen regulation of the market and make forex trades more expensive.
One foreign bank received a warning from the State Administration of Foreign Exchange (SAFE) regulator and was forced to increase money set aside for trades as a penalty in November due to its "aggressive" business model for forex operations, said a senior China-based banker in the FX team at a foreign bank. The person's own bank had shut down buy-side forex trades.
"It's possible that the foreign banks did everything right, that they put aside the 20 percent reserve, that they met the 'know-your-client' (KYC) requirements, but are still trading aggressively, which is clearly against what China wants," the person told Reuters.
"We used to make so much money from arbitrage - easy money you know? Now, none."
WE'VE BEEN ROBBED
The latest move comes just three months after the People's Bank of China (PBOC) ordered banks to scrutinise clients' foreign exchange transactions to prevent illicit cross-border currency arbitrage between the offshore and onshore yuan.
On Wednesday, the country's foreign exchange regulator also said it would improve its reserve position and contingency plans to curb risks from abnormal cross-border capital flows.
"The main purpose is to crack down on excessive currency speculation and arbitrage, which may hurt the economy," said a senior economist at a think-tank linked to China's Cabinet.
"They are worried about falling FX reserves. The yuan faces obvious depreciation pressure as the Fed (U.S. Federal Reserve) may continue to raise interest rates, so policymakers are concerned and intend to take effective measures to respond."
A source at one of the affected banks said China's central bank asked them to disclose the names of their foreign exchange clients buying spot and instructed any state-owned enterprises among them to stop trading.
"The PBOC is robbing us. They're not being reasonable; even if we comply with everything, we provide all the documents, our spot volume is too large," the person said.
The PBOC and SAFE did not immediately return requests for comment.
The banks targeted were likely picked because of the large scale of their cross-border forex businesses, sources said. urn:newsml:reuters.com:*:nL3N14J1FL
MIND THE GAP
A surprise devaluation of the yuan by nearly 2 percent on Aug. 11 fuelled a wave of capital outflows on fears the economy might be slowing more sharply than thought.
The spread between the onshore and offshore yuan has been growing since the devaluation, making it increasingly difficult for the central bank to manage its currency and stem outflows.
China's central bank and commercial banks sold a net 2.19 trillion yuan ($337 billion) of foreign exchange between Jan-Nov, compared with a net purchase of 897 billion yuan in the same period in 2014. Net sales indicate capital outflows.
Another government policy adviser said the direction of China's capital account liberalisation reforms was unlikely to change, however, since they were key to greater global acceptance of its currency.
"Capital flows depends on China's economic fundamentals; we shouldn't worry too much about short-term capital outflows if we are confident about our economic fundamentals. The direction of capital account reforms will not change," he said.
The yuan has come under renewed pressure since late November amid speculation that Beijing would permit more depreciation after the International Monetary Fund announced the currency's admission into the fund's basket of reserve currencies.
The onshore yuan traded in Shanghai has lost 1.48 percent of its value since the end of November, and has repeatedly hit 4-1/2 year lows. The offshore market has traced a similar pattern, hitting its weakest level since late September 2011 this week. ($1 = 6.4935 Chinese yuan renminbi)