Offshore Yuan Drops to Three-Week Low as Data Signals Outflows

  • Chinese banks sold most foreign currency since 2010 last month
  • China studies Tobin Tax to curb short-term fund flows

The yuan dropped to the lowest level in more than three weeks in Hong Kong offshore trading as a surge in foreign-exchange sales by Chinese banks suggested more capital is leaving the world’s second-largest economy.

Domestic lenders sold a net 695.3 billion yuan ($109.4 billion) of foreign currency in September, the most since 2010, according to data Thursday from the State Administration of Foreign Exchange. China reported third-quarter gross domestic product numbers this week that were the weakest since 2009, while capital outflows climbed to a record last month.

"There were capital outflows and the situation will likely continue in the short run," said Liu Jian, a Shanghai-based researcher specializing in cross-border capital flows at Bank of Communications Co. "But the pace will become slower as China’s economy stabilizes and the nation bolsters the yuan’s case to be named a reserve currency."

The freely traded offshore yuan declined 0.27 percent to 6.3863 a dollar as of 5:46 p.m. in Hong Kong, data compiled by Bloomberg show. It earlier dropped to 6.3925, the weakest since Sept. 28. The onshore rate, which is restricted to moving a maximum 2 percent on either side of a daily fixing, fell 0.14 percent to close at 6.3574 in Shanghai, according to China Foreign Exchange Trade System prices.

The People’s Bank of China weakened the daily reference rate by 0.04 percent to 6.3497.

China’s leadership is considering a pledge to liberalize the capital account by 2020 in its next five-year plan, further freeing the flow of money across its borders, according to a person familiar with the discussions who asked not to be identified. The nation is currently studying measures, including a so-called Tobin Tax, to suppress any abnormal and significant flows of short-term funds that seek arbitrage, Wang Xiaoyi, deputy administrator of the SAFE, said Thursday at a press conference in Beijing.

Capital outflows from China climbed to $194.3 billion in September, exceeding the previous high of $141.7 billion in August, according to a Bloomberg estimate that also takes into account decisions by exporters and direct investment recipients to hold funds in dollars. A gauge of foreign-currency assets held by Chinese financial institutions, including the central bank, declined by the equivalent of 761.3 billion yuan, also a record, official data showed Friday.

— With assistance by Justina Lee, and Tian Chen

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