Yuan Advances as PBOC's Reserves Signal Capital Outflows Eased

Updated on
  • Central bank's currency hoard rises first time since October
  • Funds exodus slows on stable yuan, dollar weakeness: analyst

The yuan strengthened in Shanghai as China’s foreign-exchange reserves rose for the first time in five months, indicating decreased depreciation pressure and slower capital outflows.

The world’s largest currency hoard unexpectedly increased by $10.3 billion to $3.21 trillion last month, the People’s Bank of China said in a statement Thursday. That was the first gain since October and compared with a $6.3 billion decrease expected by economists surveyed by Bloomberg. The stockpile posted the first-ever annual decline last year as the monetary authority sold the greenback to prop up the yuan.

The increase suggests that “capital outflows from China have slowed due to a stabilizing yuan, tightened capital controls and depreciation of the dollar,” Zhou Hao, a Singapore-based economist at Commerzbank AG, wrote in a note. “Looking ahead, we believe that the pressure on the yuan will moderate somewhat.”

The Chinese currency climbed 0.2 percent to 6.4690 a dollar as of 6:04 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. The yuan in Hong Kong fell 0.03 percent to 6.4843, while a Bloomberg replica of the CFETS RMB Index, which tracks the monetary unit against 13 exchange rates, dropped 0.26 percent to 97.56.

Gains in other currencies that the PBOC probably holds in its reserves, such as the euro, yen and pound, also helped boost the reserves, according to Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. PBOC Deputy Governor Yi Gang said in March the nation held euro and pound in the stockpile, both of which advanced more than 3 percent versus the dollar last month.

Reserves in SDRs

The PBOC also released the stockpile denominated in the International Monetary Fund’s Special Drawing Rights for the first time as Governor Zhou Xiaochuan pledged to help broaden the use of the currency basket last month in Paris. The hoard was valued at SDR2.28 trillion at the end of March. The yuan will be added to the basket of official reserve currencies, which is composed of the dollar, euro, yen and pound, later this year.

Zhou also said China is looking into issuing SDR-denominated bonds. Releasing the reserve figures in SDRs will help reduce valuation changes caused by fluctuations in major currencies, the PBOC said in a statement Thursday.

Daily Fixing

The PBOC raised its daily reference rate, which restricts onshore moves to 2 percent on either side, by 0.07 percent to 6.4707 a dollar on Thursday. That lagged a 0.3 percent drop in a gauge of dollar strength overnight.

“I think the fixing mechanism is not fully market-driven,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. “Since mid-January, the PBOC has been attempting to use the fixing as a tool to guide the currency market again and managed to keep the yuan’s exchange rate against the dollar relatively stable. This, in turn, replaces previous suspected intervention in the foreign-exchange market.”

In the money market, the seven-day repo rate, a gauge of interbank funding availability, rose one basis point at 2.29 percent, according to weighted average prices from the National Interbank Funding Center. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose three basis points to 2.36 percent, according to data compiled by Bloomberg. The yield on government bonds due January 2026 climbed four basis points to 2.93 percent.

— With assistance by Tian Chen, and Kyoungwha Kim

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