Offshore Yuan Drops Most in 15 Months on Probe of Inflows

The yuan fell in Hong Kong’s offshore market by the most in 15 months and the onshore spot rate retreated from a 19-year high as China stepped up scrutiny of cash transfers from abroad.

Warning notices will be sent out to trading companies whose goods and capital flows do not match, as well as to those that are bringing large amounts of funds into China, the State Administration of Foreign Exchange said in a statement dated yesterday. Chinese lenders must boost foreign-exchange positions when loan-to-deposit ratios for overseas currencies exceed reference levels, the currency regulator said.

The offshore yuan declined 0.4 percent to 6.1790 per dollar as of 5:20 p.m. in Hong Kong, the biggest loss since January 2012, according to data compiled by Bloomberg. It is still 0.7 percent stronger than at the start of this year and touched a record 6.1516 today. The yuan weakened 0.18 percent in Shanghai to close at 6.1667, the steepest decline since December, according to the China Foreign Exchange Trade System.

“We could see demand for dollars surge on the SAFE statement,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “We can’t tell what the actual impact is, as the situation could be different for individual banks. Yet we do see more dollar demand now.”

The onshore rate touched 6.1521 a dollar today, the strongest level since the government unified official and market exchange rates at the end of 1993. The currency has rallied 1 percent this year.

B List

Exporters and importers that are issued SAFE’s warnings have 10 days to explain the need for their transactions and those who fail to comply or are unable to provide satisfactory proof will then be placed on the regulator’s so-called B list, which means their activities will be closely monitored for at least three months.

SAFE said it will “conduct on-site verifications and checks for clues of abnormal capital inflows” and will “severely punish those who use fake documents.” The agency also told banks to “enhance checks to uncover behaviors such as forging fake trade deals” among clients.

“If the market perceives that China’s authorities are clamping down more aggressively on renminbi appreciation, then the positive sentiment that has been building around the currency could fade,” Paul Mackel and Ju Wang, Hong Kong-based strategists at HSBC Holdings Plc, wrote in a research note. The increased scrutiny of foreign-exchange flows suggests recent yuan gains have breached “a level of tolerance,” HSBC said.

The People’s Bank of China set the daily reference rate

0.06 percent stronger at 6.2114 per dollar. The currency is allowed to diverge a maximum 1 percent from the fixing. Twelve-month non-deliverable forwards slid 0.28 percent to 6.2411, a

1.2 percent discount to the onshore exchange rate.

‘Dynamic’ Equilibrium

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, declined five basis points, or 0.05 percentage point, to 1.56 percent. It jumped 18 basis points last week, the biggest increase since the five days ended Jan. 11.

The debate over the yuan’s exchange rate should focus on the mechanism by which the currency’s level is set, not its actual valuation, China’s official Xinhua News Agency wrote in an unsigned commentary on May 3. The goal should be on “perfecting” the mechanism to guide the yuan to a “dynamic” equilibrium, Xinhua wrote.

The yuan will gain 0.8 percent in the rest of the year to

6.12 per dollar by end of December, according to the median forecast of analysts in a Bloomberg News survey.

The regulatory change is prompting market participants to rein in bets on yuan appreciation and this may last for a few days, said Cliff Tan, East Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in Hong Kong.

“But long-term direction has to do with fundamental valuations and cyclical needs,” he said. “Going forward, it still makes sense for Chinese authorities to have a slow appreciation crawl in terms of the onshore fixing, so spot appreciation is also still on the cards.”