Yuan Declines Amid Bets Depreciation Concern Spurring Outflows

  • Import surge from Hong Kong may show capital exit, OCBC says
  • FX reserves shrank if adjusted for valuation effects: Goldman

The yuan fell the most in two weeks amid speculation depreciation concerns are prompting investors to shift money overseas and as the dollar headed for its biggest five-day gain since November.

A record surge in imports from Hong Kong last month indicates that people are moving money out because they expect the dollar to strengthen as the Federal Reserve prepares to increase interest rates, said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. China’s imports from Hong Kong jumped 204 percent in April to $2.1 billion, according to official data released Saturday.

“As long as there is an expectation of yuan depreciation against the dollar, there will be a massive outflow of funds,” said Iris Pang, Hong Kong-based senior economist for greater China with Natixis Asia Ltd. “As long as channels under the capital account are still semi-closed, trade will remain a shadow channel for funds outflows.”

The yuan dropped 0.25 percent to 6.5065 a dollar as of 4:53 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. A gauge of dollar strength climbed for the fifth day, extending its gains to 1.9 percent. The offshore yuan traded in Hong Kong was little changed at 6.5201.

FX Reserves

A surprise $7 billion increase in China’s foreign-exchange reserves in April was partly due to moves in currencies that are part of the stockpile, according to a note from Goldman Sachs Group Inc. economists. Adjusted for estimated valuation effects, the reserves would have decreased by $6 billion, they said. The onshore yuan will decline 2.2 percent by the end of this year, based on the median estimate in a Bloomberg survey.

"Outflows from China have eased but they haven’t reversed and remain a real problem," said OCBC’s Xie. "Our core scenario is that the Fed will raise interest rates and the dollar will strengthen, so the yuan will weaken against the greenback. But the bottom line is that disorderly capital outflows have paused."

While China has strict rules on moving capital offshore, those seeking to evade limits can sometimes disguise money flows as payment for goods exported or imported to foreign countries or territories, especially Hong Kong. Economists have earlier said they suspect China’s December, January and February trade numbers were skewed by this activity.

The People’s Bank of China raised its daily reference rate by 0.15 percent to 6.5105 a dollar on Monday, while a Bloomberg replica of a 13-currency index tracked by the monetary authority climbed 0.27 percent to 96.89.

— With assistance by Tian Chen

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