China’s yuan extends gains for second day on easing capital outflow worries and upbeat forex, trade data

The central bank raises the reference rate for a second day and tells commercial banks to avoid ‘herd behaviour’

PUBLISHED : Wednesday, 08 August, 2018, 1:09pm
UPDATED : Wednesday, 08 August, 2018, 6:21pm

China’s yuan extended gains on Wednesday as worries eased over potential capital outflows from the country after better-than-expected trade and foreign exchange data showed that the impact from the trade war was limited, at least for now.

Onshore yuan rose by as much as 0.45 per cent to 6.8003 per dollar, before trading lower at 6.8377 and halting an almost 7 per cent decline since mid-June. Offshore yuan eased slightly by 0.31 per cent to 6.8419 per dollar, after surging 0.66 per cent on Tuesday in its biggest daily gain since March 26.

China’s exports expanded 12.2 per cent in July from a year earlier, beating forecasts of 10 per cent while imports rose 27.3 per cent, well above estimates of 16.5 per cent. As a result, the trade surplus narrowed to US$28.05 billion, compared to a predicted US$38.92 billion and down from US$41.46 billion in June, according to Bloomberg data.

Foreign reserves unexpectedly rose for a second month to US$3.118 trillion in July, exceeding a US$3.107 trillion forecast, according to official data on Tuesday.

Analysts said the increase mainly came from foreign investment after China opened up more sectors, especially after global index provider MSCI’s inclusion of yuan-denominated equities in its indices.

“The tone for the Chinese yuan is bearish but the market’s resolve to take the currency above 7 [to the US dollar] does not match that of the policymakers to cap it at the same level,” said Philip Wee, currency strategist at DBS Bank.

The People’s Bank of China (PBOC) has been reportedly talking up the yuan, telling Chinese banks on Monday to avoid “herd behaviour” when trading the currency.

That came just after it raised the reserve requirement ratio to 20 per cent from zero for financial institutions when they conduct onshore yuan forwards business on behalf of customers, making it more expensive to short the currency.

On Wednesday the PBOC also lifted the yuan’s daily midpoint by 0.17 per cent to 6.8313 per dollar for a second straight day. Traders are allowed to trade the currency up to 2 per cent on either side of the fix.

The recent list of penalties on entities that breach cross-border fund flows announced by the foreign exchange regulator, State Administration of Foreign Exchange, is also likely to have curbed capital outflow pressure, said Iris Pang, Greater China economist at ING Bank.

However, the PBOC’s support so far did not necessarily point to a change in course from yuan depreciation to appreciation, unless the dollar started to weaken against major currencies, analysts said.

“Investors are starting to see value following sharp asset price declines over the past few months,” said Khoon Go, head of Asia research at ANZ Bank. “However, a more meaningful return of inflows will depend on US-China trade tensions easing, or at the very least not deteriorating further.”

Henry McVey, head of global macro and asset allocation at private equity firm KKR agreed, noting that the trade war and China’s deleveraging were creating massive undercurrents to growth relative to the more benign generic headline level macro data that is currently being reported.

“While the aggregate numbers in China look fine, it is not business as usual,” McVey said.