Offshore Yuan Weakens as Foreign-Exchange Data Show Bearish Bets

  • Chinese banks sold a net 568.3 billion yuan of FX for clients
  • Shanghai lenders limit individuals' foreign currency purchases

The offshore yuan dropped for a third day as data on Chinese banks’ foreign-exchange transactions added to evidence that investors are becoming more bearish on the currency amid capital outflows.

Chinese banks sold a net 568.3 billion yuan ($86.4 billion) of overseas currencies to their clients in December, the State Administration of Foreign Exchange said on its website. That’s a sixth consecutive month of net selling and more than twice the amount in November. Some Shanghai banks have asked their branches to check closely whether individuals sent money abroad by breaking up foreign-currency purchases into smaller transactions and to take punitive action if violations are discovered, according to people familiar with the matter.

"Onshore corporates and individuals are hoarding the dollar,” which reflects investors’ expectations that the yuan will weaken further, said Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia. "As long as market confidence in the yuan remains fragile, such a scenario will continue."

The yuan traded in Hong Kong fell 0.04 percent to 6.6059 a dollar as of 4:11 p.m. in London, data compiled by Bloomberg show. The onshore-traded currency was little changed at 6.5797. The monetary authority set the reference rate little changed at 6.5585.

Outflow Pressure

Outflows pressure eased in the fourth quarter and cross-border capital flow risks are controllable, SAFE said. China’s foreign-exchange reserves, which dropped by a record $108 billion to $3.33 trillion in December, are ample and are a buffer against external shocks, according to the regulator.

Some $508 billion of capital left China in the August-November period, according to a Bloomberg estimate that takes into account funds held in dollars by exporters and direct investment recipients. The central bank’s foreign-exchange assets tumbled by an unprecedented 708 billion yuan to 24.85 trillion yuan in December, data showed Friday. That compares with a drop of 2.21 trillion yuan for the whole of 2015.

China will firmly crack down on illegal currency transactions, including underground banking, and tighten risk controls and strengthen supervision to safeguard market order, the Shanghai branch of SAFE said in a statement. Banks in the city have been ordered to stop promoting individual foreign-exchange purchases, said the people familiar. Two of them said that their lender was ordered by the regulator to report its latest foreign-currency data.

"This is a measure to reduce capital outflows from China as most investors are betting the yuan will weaken," said Aaron Chan, director of retail sales at ADS Securities Hong Kong Ltd. "The government will likely introduce more administrative measures to damp depreciation expectations in the first half and use its foreign-exchange reserves to support the yuan while allowing it to decline in a very gradual way."

— With assistance by Tian Chen

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