China begins to loosen capital controls as yuan stabilises
First easing since heightened capital controls were imposed at the end of last year may point to gains in other Asian currencies
China relaxed some of its capital controls this week, scrapping the restriction on banks processing outbound yuan payments, but analysts cautioned that the move was not a signal to sell yuan assets.
The People’s Bank of China had required commercial lenders to stop processing cross-border yuan payments unless they could show at the end of each month that the amount of outbound yuan matched the sum that came in.
Some market watchers even believe the decision, which marks the first loosening step since heightened capital controls were imposed at the end of last year, points to further strengthening of some of Asia’s currencies.
The easing comes as market sentiment is improving on both the domestic and overseas fronts. Official data showed this week that China’s first-quarter gross domestic product growth clocked in at 6.9 per cent, the strongest since 2015 and just above the 6.8 per cent in the fourth quarter last year. Other key data for March, including fixed-asset investments, retail sales and industrial output, also came in higher than expected.
Protectionist fears have receded since Chinese President Xi Jinping and his US counterpart Donald Trump said earlier this month that they would come up with a plan within 100 days to address Sino-US trade imbalances. The focus is turning to how China will open up trade to the US rather than on restricting Chinese exports to the US.
Trump’s comments that the US dollar was strengthening too much may also signal a rethink of his strong-dollar policy and have already seen the dollar trading weaker against the yuan and other Asian currencies. The yuan has edged up 0.9 per cent to 6.8836 per dollar so far this year after dropping 7 per cent in 2016.
“Overall market confidence is likely to continue after relaxation of capital controls even if the move leads to a bigger supply of offshore yuan,” said Larry Hu, head of China economics at Macquarie.
The PBOC scrapped the restriction on cross-border yuan payments imposed in early January, banking sources told the South China Morning Post on Tuesday.
At the same time, capital outflows are also abating. The State Administration of Foreign Exchange, the nation’s currency regulator, said this week that data showed a decline in demand for converting yuan into foreign currency because expectations of further yuan depreciation had eased. First-quarter foreign-exchange net sales fell 67.2 per cent to US$40.9 billion.
DBS Bank estimates there was US$24 billion worth of capital inflows into China in February, the first positive reading since January 2015 and a sign that market sentiment in the economy and the yuan has improved.
Any further loosening of policy was likely to be slow because of lingering uncertainties over North Korea, the upcoming French elections and the US Federal Reserve’s goal to shrink its balance sheet this year, said Gao Qi, an analyst at Scotiabank.
However, the PBOC had persistently been setting the daily yuan reference rate stronger this week, suggesting it would guide the rate higher on any drops in the overnight dollar index, Gao said.
The yuan’s effective exchange rate, an index showing its strength relative to a basket of other currencies, had been fairly stable since mid-2016 although short-term swings had generally tracked the dollar in global foreign-exchange markets, Standard Chartered Bank analysts wrote in a recent note.
Partly reflecting a more stable yuan, it raised its estimates for other currencies in the region, including the Malaysian ringgit, the Taiwan dollar and the Singapore dollar.
“Asian currencies probably will continue to be buoyed by a softer dollar,” said Mitul Kotecha, head of Asia macro strategy at Barclays.