The yuan yesterday came under selling pressure after The Wall Street Journal reported that the Bank of China had won approval to bring back 10.5 billion yuan to invest on the mainland, prompting speculation that China was taking a significant step towards liberalising its capital account.
Strong demand for the yuan from overseas investors who cannot access mainland capital markets means the offshore yuan spot rate has been stronger against the US dollar than the onshore yuan rate, reflecting speculative bets that the mainland currency would continue to strengthen.
But yesterday the offshore yuan spot rate traded at a discount to the onshore rate after many speculators unwound their positions - even though the Bank of China said the report was 'untrue', while declining to comment further.
Foreign exchange traders and analysts were left scratching their heads at the sudden decline of the value of the offshore yuan rate.
The US dollar gained against the yuan, buying 6.4770 yuan yesterday afternoon, compared with 6.4745 on Wednesday.
'The foreign exchange market doesn't square with the development,' said Ashley Davies, an analyst with Commerzbank, referring to the report that Bank of China had been cleared to bring back some yuan. 'Traders were jumping up and down.'
The yuan sell-off was most evident in the forward market where most speculators operate.
