China Banks Buy More Dollar Forwards as Bets on Weak Yuan Wane

  • Lenders bought net 8.6 billion yuan of FX forwards in May
  • Data suggest investors turn less bearish on currency: analyst

China’s banks bought more foreign-currency forwards than they sold in May for the first time in 17 months, signaling the lenders’ clients have turned more optimistic on the yuan as capital outflows abated.

Banks bought a net 8.6 billion yuan ($1.3 billion) of forwards from customers last month, the State Administration of Foreign Exchange said in a statement posted on its website on Monday. That compares with record net selling of 428.4 billion yuan in August, when policy makers devalued the currency, and is the first time the figure turned positive since December 2014.

The change comes after the pace of capital outflows from China slowed to an estimated $43 billion in April, the least since last June, according to Bloomberg Intelligence. The International Monetary Fund will include the yuan in its basket of reserves in October, and China’s currency also got a tailwind from the Federal Reserve’s commitment to taking a gradual approach to raising interest rates.

"The yuan’s outlook now is brighter than it was at the beginning of this year," with the forwards data suggesting investors are getting more optimistic about the currency over the longer term, said Ken Cheung, a Hong Kong-based currency strategist at Mizuho Bank Ltd. "As the dollar’s strength has been losing its upside momentum, there will be more capital inflows to the Chinese market on the yuan’s inclusion in the IMF’s Special Drawing Rights."

The yuan added 0.1 percent to 6.5810 per dollar as of 6:13 p.m. in Shanghai. The Chinese currency will drop 1.8 percent by the end of this year, according to analysts’ median forecast in a Bloomberg survey.

Options traders are pricing in 12 percent odds of a 6 percent decline to 7 per dollar by year-end. That probability has declined from more than 30 percent in January after authorities intervened to prop up the exchange rate, tightened capital controls and launched a verbal campaign to stem volatility.

Chinese lenders bought 54 billion yuan of currency forwards from clients last month, and sold 45.4 billion yuan to them, the SAFE data showed. They sold a net 67.7 billion yuan of spot foreign-exchange to their customers in May, according to the regulator.

— With assistance by Tian Chen

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