Offshore Yuan Advances for Second Week as PBOC Steps Up Defense

  • China has no intention of devaluing currency: vice president
  • Government will allow only gradual decline: Bank of East Asia

The offshore yuan rose for a second week after Chinese authorities stepped up their defense of the currency amid capital outflows and a slowing economy.

The central bank said Monday it will impose reserve-requirement ratios on yuan deposited onshore by overseas financial institutions from Jan. 25, a move that may increase the cost of short-selling the currency. China has no intention of devaluing the yuan and fluctuations in the exchange rate are a result of market forces, Vice President Li Yuanchao said on Thursday. Asia’s largest economy expanded the least since 2009 last quarter and the Shanghai Composite Index of stocks is down 18 percent this year.

"Chinese authorities won’t let the yuan devalue sharply because that will hamper the currency’s internationalization and exacerbate capital outflows," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. "Even though China’s economy is going downhill, the government will only allow the yuan to weaken slowly as it uses its foreign-exchange reserves to stabilize the exchange rate."

The yuan traded in Hong Kong gained 0.11 percent this week and dropped 0.04 percent on Friday to 6.6063 a dollar as of 4:04 p.m. London time, data compiled by Bloomberg show. The currency rose 0.09 percent from Jan. 15 in Shanghai and was little changed on Friday at 6.5785. The monetary authority strengthened its reference rate, which the onshore yuan can trade as much as 2 percent either side of, by 0.1 percent this week to 6.5572.

A Bloomberg replica of a new yuan index, which is composed of 13 currencies and published by the China Foreign Exchange Trade System, advanced 0.2 percent this week to 100.66, trimming this year’s loss to 0.7 percent. Ma Jun, chief economist at the PBOC’s research bureau, said last week that the yuan will be more stable against a basket of currencies but become more volatile versus the greenback as China reforms it foreign-exchange system.

Reserve Ratio

The reserve ratio required by the People’s Bank of China will be the same as the 17.5 percent applied on big mainland lenders, according to people familiar with the matter. The move came after the monetary authority intervened repeatedly in the offshore market, draining liquidity in Hong Kong and pushing the interbank lending rates for the currency to record highs.

Some Shanghai banks have askedbranches to check whether individuals sent foreign-currency abroad by breaking up their purchases into smaller transactions and will take punitive action if violations are discovered, according to people familiar with the matter.

Chinese banks sold a net 568.3 billion yuan ($86.4 billion) of overseas currencies to their clients last month, the State Administration of Foreign Exchange said on its website Thursday. That’s a sixth consecutive month of net selling and more than twice the amount in November. China’s foreign-exchange outflows rose to $97 billion in December from $39 billion a month earlier, Goldman Sachs Group Inc. economists led by Hong Kong-based MK Tang wrote in a note on Friday.

Outflow pressure eased in the last quarter and cross-border capital flow risks are controllable, SAFE said Thursday. 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.

— With assistance by Tian Chen

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