China’s Yuan Positions Drop by Record Amid Currency Defense

Updated on
  • Capital outflows rose on depreciation bets, says researcher
  • Measures to spur confidence seen reducing market concern

Yuan positions at China’s central bank and financial institutions fell by the most on record in August, a sign that policy makers stepped up intervention to support the currency.

The total for the People’s Bank of China dropped by 318.4 billion yuan to 26.1 trillion yuan ($4.1 trillion) from the end of July, according to a report Monday on what the monetary authority calls positions for foreign exchange purchases. Yuan positions at Chinese financial institutions accumulated from foreign-exchange purchases tumbled 723.8 billion yuan to 28 trillion yuan, the data showed.

“The massive drop in yuan positions results from accelerated capital outflows in August, as depreciation expectation on the yuan became very strong,” said Liu Jian, a Shanghai-based researcher at Bank of Communication Co. “Also, the PBOC sold the dollar to prop up the yuan in the spot market. China will continue to face outflow pressures as the economic fundamentals are weakening.”

The drop in the positions, which indicate outflows, adds to signs that the PBOC intervened in the foreign-exchange market to prop up the yuan after an Aug. 11 devaluation.

The central bank last week reported a record $93.9 billion monthly decline in its foreign-exchange reserves, giving weight to speculation that it sold dollars to fight off yuan depreciation pressure. Chinese authorities have repeatedly stressed that they want currency stability as they try and persuade the International Monetary fund to grant the yuan global reserve status later this year.

Curbing Outflows

China has taken several measures to stem outflows and limit depreciation bets on the yuan. The State Administration of Foreign Exchange has told banks to conduct special checks on currency trading under capital accounts, people familiar with the matter said Monday. Earlier this month, the PBOC asked financial institutions to set aside 20 percent of forward contract sales in reserve for a year with zero interest.

"China’s introduction of administrative measures to curb capital outflows and its measures to maintain confidence in the stability of the exchange rate has reduced anxiety in the market," said Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong Ltd. "Therefore, depreciation expectation has eased and the outflow pressures will probably not be as strong as last month in September."

— With assistance by Tian Chen, and Jeff Kearns

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