Year-end capital outflows to pressure yuan further

The yuan extended its losses on Friday after the central bank set its reference rate significant lower. Analysts believe that the currency will face intensified pressure in the short term as capital outflows are expected to accelerate and the Federal Reserve is very likely to raise interest rates.

Offshore yuan dropped by 0.27 per cent to trade at 6.9314 against the US dollar on Friday evening in Hong Kong.

Onshore yuan in Shanghai was trading at 6.9017 per US dollar, 0.32 per cent weaker than the closing price the previous day.

The weakening of the yuan came after China’s central bank, the People’s Bank of China, cut the daily reference rate by 241 basis points or 0.35 per cent to 6.8972 per US dollar, the biggest daily reduction in seven weeks.

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

“The yuan is expected to continue the weakening trend in the remainder of December,” said Yu Jing Jing, an analyst at Guoxin Securities (Hong Kong) in a report. “December and January usually see surging capital outflows.”

China’s foreign exchange reserves declined at a faster pace in November, down by US$67.1 billion, compared to a drop of US$45.7 billion in October.

UBS economist Wang Tao earlier this week said China’s actual underlying outflows may have been larger than official figure suggest. prompting Beijing to further tighten capital controls.

The Post exclusively reported on Friday that Macau is preparing to slash in half the amount of cash China UnionPay bank card holders can withdraw from ATM machines in the gambling hub. That move came after the Chinese government earlier imposed restrictions on mainlanders’ insurance purchases with UnionPay in Hong Kong.

In addition, as Donald Trump prepares to take office in January, expectations of interest rate hikes by the Fed in 2017 are increasing, which is driving up US Treasury yields, said Yu.

“With the yuan’s short-term funding costs easing, there was a move above 6.90 briefly as traders felt a bit more at ease,” said Stephen Innes, senior trader at OANDA.

“The move quickly gave way to profit taking and softer US dollar sentiment across the board as year-end mentality grips trader sentiment on the offshore yuan.”

The Hong Kong Interbank Offered rate of the yuan (CNH Hibor) surged earlier this week as Chinese authorities tightened liquidity in the offshore market to hit yuan short sellers with rising borrowing cost.