Yuan Gains as China Foreign Reserves Decline Less Than Forecast

  • Hoard shrinks $43 billion, compared with $57 billion estimate
  • Data suggest capital outflow concern overdone, says Macquarie

The offshore yuan rose toward a two-month high after China reported a smaller-than-estimated decline in its foreign-exchange reserves, a sign that capital outflow pressures are easing.

The stockpile shrank $43.3 billion in September, less than the $57 billion drop predicted in a Bloomberg survey of economists. The hoard, still the world’s largest at $3.51 trillion, fell by a record $93.9 billion in August after a shock yuan devaluation spurred unprecedented outflows and prompted the central bank to sell dollars to prop up its exchange rate.

“Today’s data suggest concerns about capital outflows are overdone,” said Larry Hu, Hong Kong-based head of China economics at Macquarie Securities Ltd. “With stabilized expectations on the renminbi and more companies getting their positions hedged, the pace of decline in the reserves should slow.”

The yuan, known officially as the renminbi, rose 0.25 percent to 6.3398 a dollar as of 1:56 p.m. in Hong Kong, near a Sept. 30 level of 6.3332 that was the strongest since the Aug. 11 devaluation. The offshore yuan last week erased its discount to the Shanghai rate, which exceeded 2 percent on Aug. 12, amid speculation the central bank was selling dollars. Financial markets on the mainland will reopen on Thursday after a week-long holiday.

(in US$ billions)

China has taken several steps to stem capital outflows, estimated at $141.66 billion in August, as Premier Li Keqiang tries to revive an economy forecast to grow at the slowest pace in 25 years. The People’s Bank of China has ordered financial institutions to set aside 20 percent of yuan forward contract sales in reserve for a year with zero interest, while the State Administration of Foreign Exchange has told banks to conduct special checks on currency trading under capital accounts.

The nation’s leaders have signaled their support as well, with President Xi Jinping saying last month that there’s no basis for sustained depreciation. China’s efforts to get the yuan into the International Monetary Fund’s basket of reserve currencies received a boost recently, with the U.S. saying it backs inclusion provided existing criteria are met.

China’s foreign-exchange reserves fell a record $180 billion in the three months through September, according to Bloomberg calculations based on the data released by the PBOC on Wednesday.

The yuan overtook Japan’s yen to become the fourth most-used currency for global payments in August, rising to its highest ranking ever and boosting its claim for reserve status at the IMF. The proportion of transactions denominated in yuan climbed to a record 2.79 percent in August, from 2.34 percent in July, according to a Society for Worldwide Interbank Financial Telecommunications statement on Tuesday.

The yuan’s 12-month non-deliverable forwards rose 0.22 percent on Wednesday to 6.5340 a dollar, the strongest level since Aug. 12, according to data compiled by Bloomberg.

“The obvious interpretation is that panic over cascading capital flight was overdone,” according to a note from Bloomberg economists Tom Orlik and Fielding Chen. “After the equity market rout in July and the currency surprise in August, September was a period of relative calm.”

For more, read this QuickTake: The People’s Currency

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