China Yuan Positions at Banks Fall for First Time Since 2007

Yuan holdings at Chinese banks fell for the first time since December 2007, fueling speculation capital outflows will take pressure off policy makers to speed up gains in the currency.

Financial institutions’ yuan positions declined a net 24.9 billion yuan ($3.9 billion) in October, according to a statement on the People’s Bank of China website. That compared with a net inflow of 247.3 billion yuan in September. Economists watch the numbers for signs of inflows or outflows of so-called hot money.

China will move to allow more yuan flexibility in an active, gradual and controllable manner, the official China Central Television channel cited Premier Wen Jiabao as telling President Barack Obama on Nov. 19 at a summit of Asian leaders in Bali, Indonesia. Obama said on Nov. 14 that “enough is enough” on what the U.S. views as too slow gains in the yuan.

“Capital outflows are evidence that the yuan is overvalued, not undervalued,” Tim Condon, Singapore-based head of Asian research at ING Groep NV, wrote in a research note today. “We think the suggestion of outflows is a near insurmountable obstacle to any exchange-rate reform like widening the yuan trading band.”

The yuan fell 0.07 percent to 6.36 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It gained 3.7 percent this year, the best performance among Asia’s 10 most-traded currencies excluding the yen and has advanced 30 percent since being revalued in July 2005.

‘Basically Finished’

China’s yuan appreciation is “basically finished” and it may become overvalued if it strengthens more, Zhang Monan, an economic researcher at the State Information Center, wrote in a commentary posted on the Economic Information Daily’s website today. A reduction in the nation’s trade surplus and rising overseas investment have been easing appreciation pressure, Zhang said.

Obama told President Hu Jintao in Honolulu this month that the U.S. public and businesses were losing patience with China’s policies. Afterward, the Chinese Foreign Ministry released a statement saying the U.S. trade deficit and unemployment aren’t caused by the yuan-dollar exchange rate and a large appreciation in the currency won’t solve U.S. problems.

The yuan may face depreciation in two years as the country’s trade surplus may account for less than 1.6 percent of gross domestic product in 2011, Li Daokui, an adviser to the PBOC, said on Nov. 18. China’s economy expanded 9.1 percent last quarter from a year ago, the least since 2009.

The central bank strengthened the daily reference rate for the yuan by 0.04 percent to 6.3522 today. The currency is allowed to trade 0.5 percent either side of the fixing. Twelve-month non-deliverable forwards for the yuan dropped 0.28 percent to 6.3500.