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China economy

Chinese scramble to safety of US dollar as yuan weakens and forex reserves drop

PUBLISHED : Saturday, 09 January, 2016, 12:54am
UPDATED : Monday, 30 May, 2016, 5:09pm

Lynn Zhang, a Shanghai resident, took three ID cards – hers, her mother’s and her father’s – to a bank branch last summer and bought US$150,000 to offset a weakening yuan.

“It’s not a speculative act but a protective one,” Zhang said. While her expenses in US dollars, mainly on overseas trips, will not exceed US$10,000, she said a fat dollar savings account was a good guarantee of value if China’s economy continued to slow and the yuan continued to fall.

As yuan depreciation deepens and the fall of China’s reserves accelerates, a growing number of Chinese individuals and companies are rushing to turn yuan into dollars. A wave of money-changing is taking place in many parts of the country, sometimes beyond the capacity of banks to handle, according to the Shanghai Securities News.

The State Administration of Foreign Exchange, the foreign exchange regulator, had ordered banks in some areas to limit US dollar purchases this month to curb outflows, Reuters reported.

“It’s quite natural for some people to want to alter their currency portfolios when expectations change,” said Tao Dong, the chief economist for non-Japan Asia at Credit Suisse in Hong Kong. “If everyone in the market is seeing the same direction, then the exchange rate must not be right.”

A key risk with the yuan’s exchange rate is the lack of proper ways to quantify its risks. “If you can’t quantify the risks, you can’t hedge against the risks,” Tao said.

The shift from yuan assets to dollar ones by Chinese companies are individuals is believed to be a key factor in the fall in China’s foreign exchange reserves, which recorded the biggest monthly decline in December.

READ MORE: A trillion-dollar question on China’s forex dilemma: just how low should its reserves go?

Meanwhile, the People’s Bank of China allowed the currency to weaken 2 per cent in the first four trading days this year before it set the yuan a bit stronger yesterday.

“What surprises people this week is that the central bank hasn’t been intervening aggressively to support the currency,” said Andrew Batson, economist at Gavekal Dragonomics in Beijing. “There’s a lot of questions, basically, in the market such as ‘what the hell is the PBOC doing’ and ‘what they are trying to achieve’?”

But the corporate and individual transactions did not amount to “capital flight” because the funds would stay largely within the Chinese banking system, Batson said.

If you can’t quantify the risks, you can’t hedge against the risks
Tao Dong, Credit Suisse

Safe has said that the fall in reserves is partly a result of “putting foreign exchange in the hands of the people”, meaning that forex transactions were shifting from the state to the private sector.

Chen Bingcai, from the Chinese Academy of Governance, said most people and firms looked to the yuan’s rate to the US dollar, even though the PBOC may want the market to accept the yuan rate versus a basket of currencies.

At the same time, individual foreign currency purchases would be quite limited compared to China’s overall reserves, Chen said. “It’s very hard to profit from buying and selling US dollars over the bank counter, and when you change yuan into dollars, you will find the interest rates are much lower compared to yuan saving accounts,” said Chen, who had previously worked with Safe. “If China wants to implement certain capital controls, the measures should target institutions instead of individuals.”

READ MORE: ‘It’s a kind of vicious cycle’: China’s foreign reserves fall by record US$107b in December

Zhang in Shanghai agreed there was a price to pay for the safety of US dollars. “I got 0.8 per cent annual interest from dollar savings. If the money was in yuan, I could invest in wealth management products to get risk-free returns of 4 or 5 per cent.”

Still, the US dollar is in demand. Under existing rules, an individual can buy US$50,000 worth of foreign currency a year with little red tape, and the easiest way to skirt the limit is to borrow a few ID cards from family members and friends. SAFE warned on December 31 that people who used the forex quotas of other individuals would be put on a watch list.

Telecom worker Su Jie buys US dollars every day to trade in US stocks. “I was told ... that banks had begun checking deals involving large amounts of foreign currencies, so I’ve been [cutting back],” Su said.

Additional reporting by Celine Sun and Laura Zhou