Yuan weakens amid greater capital controls in the mainland

The People’s Bank of China set the daily reference rate at 6.8958 against the US dollar, 0.14 per cent weaker

PUBLISHED : Thursday, 01 December, 2016, 12:03pm
UPDATED : Thursday, 01 December, 2016, 12:03pm

The Chinese central bank weakened the yuan on the first day of December after three days of strengthening it against the US dollar, amid a tightening of capital controls by mainland authorities desperate to stem outflows.

Onshore yuan in Shanghai traded at 6.8943 to the dollar at 11.15 am, 0.15 per cent or 0.0106 points weaker than on Wednesday, while offshore yuan in Hong Kong was trading 0.18 per cent, or 0.0126 points, higher at 6.9014.

The People’s Bank of China on Thursday set the yuan reference point against the US dollar at 6.8958, 93 basis points, or 0.14 per cent, weaker than the day before.

Traders are allowed to trade up to 2 per cent either side of the reference point for the day.

China’s currency has depreciated throughout the year and recently plunged to eight-year lows as the country tries to control its economic volatility. It has fallen around 6 per cent against the US dollar so far in 2016, dropping 1.68 per cent in November.

The currency devaluation has been a source of concern for investors as Chinese authorities tighten capital controls, curbing the purchase of outbound assets by restricting portfolio and foreign direct investment. There will also be greater scrutiny of high-value deals by the State Administration of Foreign Exchange (SAFE).

Outbound investment deals reached US$530.9 billion in the first nine months of the year, according to Thompson Reuters data.

“In the face of the recent wave of yuan depreciation, regulators have stepped up capital control measures by introducing a new policy directed a curbing Chinese investors’ portfolios and foreign direct investment from the feeding the frenzy,” Stephen Innes, senior trader at Canada-based OANDA, said in a morning note.

Currency traders are cautious as the US dollar continues its bull run and interest rate yields rise.

The Opec deal to cut oil production, announced on Wednesday, pushed US Treasury yields higher as inflationary expectations grew, according to Innes.

“Coupled with stellar US economic data, it lit a fire under the USD,” he said.

The sell-off of the yuan and other emerging market currencies will intensify as a result, Innes said, which will accelerate mainland demand for US dollars.

Meanwhile, the Japanese yen weakened slightly on Thursday morning, dropping 0.11 per cent to 114.24 per dollar at 11.15 am.