Offshore Yuan Advances as China Trade Surplus Exceeds Estimates

Updated on
Chinese Economy Adds Plunging Exports to Market Trouble
  • Gap with onshore yuan offers arbitrage trades, says analyst
  • Exports' decline spurs talk of weak economic fundamentals

The offshore yuan in Hong Kong strengthened the most in a week as China reported a forecast-beating trade surplus and investors took advantage of the currency’s discount to the spot rate in Shanghai.

The excess in trade swelled to $60.24 billion in August, the most in six months, as imports shrank 13.8 percent, according to official data released Tuesday. Exports contracted 5.5 percent, compared with a Bloomberg survey’s median estimate of a 6.6 percent drop. The nation on Monday reported a record decline in foreign-exchange reserves as it stepped up efforts to support the yuan following an Aug. 11 devaluation.

The currency in Hong Kong, which is free of the mainland’s capital controls, rose 0.25 percent, the most since Sept. 1, to 6.4655 a dollar as of 4:44 p.m. local time, according to prices compiled by Bloomberg. It was trading 1.5 weaker than the onshore spot rate in Shanghai, which fell 0.02 percent to close at 6.3672, according to China Foreign Exchange Trade System prices.

“Exports were better than expected, and the trade surplus was quite big, which is supporting the yuan,” said Eddie Cheung, a foreign-exchange strategist at Standard Chartered Plc in Hong Kong. “The gap between the onshore and offshore yuan is still large, so there’s incentive for investors to seek arbitrage trades.”

Capital Outflows

The yuan’s exchange rate is close to stabilizing and there’s no basis for long-term depreciation, People’s Bank of China Governor Zhou Xiaochuan said in a statement Saturday following a meeting of Group of 20 central bankers and finance ministers in Ankara. The monetary authority lowered its daily reference rate by 0.09 percent to 6.3639 a dollar on Tuesday.

Yuan positions on the balance sheet of the PBOC and financial institutions fell by the most on record in July, suggesting capital outflows picked up and the central bank intervened to support the yuan.

“The trade surplus gave a short-term boost to market sentiment, supporting the offshore yuan,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “But the surplus is a result of declining imports instead of strong exports, so the fundamentals are actually quite weak. The yuan will face depreciation pressure in the long run.”

— With assistance by Tian Chen

Before it's here, it's on the Bloomberg Terminal. LEARN MORE