China’s exchange regulator says no capital outflows seen during recent bout of yuan weakness

PUBLISHED : Thursday, 19 July, 2018, 9:30pm
UPDATED : Thursday, 19 July, 2018, 11:24pm

China’s exchange regulator said there has been no evidence of stepped-up capital outflows during the recent bout of volatility in currency markets, indicating that underlying conditions are very different from other periods of turmoil in markets.

“Since June 25 this year, market volatility has surged, but from the daily data such as foreign exchange settlement and sales and non-banking cross-border capital flows, it is far from the high pressure of capital outflow that took place in 2015 and 2016,” a spokeswoman for the State Administration of Foreign Exchange (SAFE), China’s exchange regulator, said on Thursday.

However, volatility in the foreign exchange markets continued throughout the session on Thursday, with China’s yuan hitting a one-year low against the US dollar.

Offshore yuan traded by international investors outside the mainland fell 0.9 per cent to 6.8029, after easing 0.5 per cent on Wednesday. The currency has fallen more than 6.4 per cent since June 14 when China’s central bank opted not to follow the US in raising interest rates.

The onshore spot yuan dropped as much as 0.8 per cent per cent on Thursday, trading at 6.7651 against the dollar, according to Thomson Reuters. The yuan has lost more 4 per cent against the greenback in the past month.

The trade row between the world’s two largest economies has intensified concerns of a potential spillover into the currency front.

The People’s Bank of China set the yuan midpoint Thursday at 6.7066, or 0.23 per cent weaker than the previous fix of 6.6914. This level marked the first time the fixing was set below the psychologically important 6.7 per dollar level since August 2017.

“In contrast to earlier this year, today’s weakness seems to reflect a more explicit policy decision. After signalling it would accept more volatility in the currency, the PBOC has followed up by lowering the daily fixing rate,” said Hannah Anderson, global market strategist at JP Morgan Asset Management. “Looking ahead, more yuan weakness seems warranted, but Chinese authorities will likely prevent the currency from moving too sharply in any direction.”

The PBOC has said it would keep the yuan stable, but analysts widely expect China to keep the yuan on a weaker footing and monetary policy lose to support the economy and boost domestic demand.

A devaluation of the yuan could neutralise the impact of the US trade tariffs on Chinese goods, which applies to US$450 billion worth of imports, just short of the US$505 billion that China sends to the US. However, a sharp fall of the yuan of more than 10 per cent in a month or two could trigger massive capital outflows from China.

“We think that China might bring devaluation [of the yuan] into the negotiations [with the US],” said Zhu Haibin, chief china economist at JP Morgan. “But it’s better not to use it because the risk [of capital flight] is very high.”

When China devalued the yuan in 2015, it suffered almost US$500 billion worth of capital flight in the same year, according to the Institute of International Finance. Global financial markets also took a hit.

The spokeswoman for SAFE said that the exchange regulator had to assess the impact of trade friction on capital flows and will use “counter-cyclical” measures to respond to short-term volatility, adding that China can cope with any challenge given its “ample” reserves.

A devaluation of the yuan can also trigger a currency war, in which other central banks would deliberately lower the value of their respective currencies.

David Rees, emerging market strategist at Bank J. Safra Sarasin, said China is wary of a being labelled a currency manipulator.

“We do not expect China to turn a trade war into a currency war. Since Beijing will ease monetary policy to support domestic demand, we have revised our forecasts. Given the experience of 2015, when fears of a Chinese yuan devaluation damaged global investor sentiment, we think that policymakers will not let the currency weaken to 7.00 to the US dollar. But we would not be surprised to see it trading closer to 6.80 to the US dollar by year-end,” Rees said in a note.

Additional reporting by Reuters