Offshore Yuan Declines as Goldman Warns Capital Outflows Rising

Updated on
  • Outflows may have prompted efforts to steady currency: Goldman
  • Sovereign bonds drop as 10-year yield climbs from decade-low

The offshore yuan halted a two-day advance, shrugging off the strongest central bank fixing since June, amid concern that capital outflows from China are increasing.

A net $55 billion left the nation in July, compared with $49 billion in the previous month, Goldman Sachs Group Inc. analysts wrote in a note, adding that their preferred gauge shows cross-border yuan outflows continue to be large. A new equity link between Shenzhen and Hong Kong could lead to funds flowing overseas because of the mainland city’s “substantially higher valuations,” according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik.

The currency traded in Hong Kong’s overseas market fell 0.14 percent to 6.6393 per dollar as of 4:53 p.m. local time. The onshore yuan weakened 0.08 percent to 6.6322 in Shanghai, after touching the strongest level since June 24 on Tuesday. The People’s Bank of China raised its daily reference rate for the third day in a row. A gauge of dollar strength ended a three-day slide after two Federal Reserve officials suggested markets were underestimating the likelihood of increases in U.S. interest rates.

“There’s a real chance for the Fed to raise rates this year, and that would add further incentive for outflows,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “The yuan is still overvalued and continues to face depreciation pressure.”

Stability Efforts

The PBOC started stabilizing the yuan in the second half of July, likely partly in response to rising foreign-exchange outflows in June and July that may have been prompted by a notable depreciation during that period, the Goldman analysts wrote. The Chinese currency advanced 0.1 percent last month, after posting its biggest quarterly drop in 22 years in the April-June period.

A Bloomberg replica of the trade-weighted CFETS RMB Index, which measures the yuan against 13 currencies, fell 0.06 percent to 94.50.

In the debt market, sovereign bonds declined for a second day. The yield on the current notes due August 2026 rose three basis points to 2.70 percent, according to National Interbank Funding Center prices. The yield on the similar maturity benchmark fell to 2.64 percent on Monday, the lowest since Bloomberg began compiling ChinaBond data in 2006.

The Ministry of Finance auctioned 35.09 billion yuan ($5.29 billion) of seven-year bonds at a yield of 2.6469 percent on Wednesday, according to statements posted on the China Central Depository & Clearing Co. That compares with 2.69 percent on the secondary market.

— With assistance by Helen Sun

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