Chinese Demand for Foreign Exchange Jumps to Highest Since 2016

(Bloomberg) -- Chinese banks sold the most foreign currency to their clients since December 2016, the latest sign that capital outflows are picking up amid weakness in the yuan.

Onshore lenders sold a net 110.3 billion yuan ($16 billion) of foreign-exchange to companies and individuals in September, according to data released Thursday by the State Administration of Foreign Exchange. The offshore currency fell as much as 0.3 percent to touch its lowest level since January 2017 after the data.

While the dollar sales were small relative to the demand seen in the wake of a yuan devaluation in 2015, the increase adds downward pressure on China’s currency, which is trading near the key level of 7 against the greenback. The yuan has been relatively stable in recent weeks after tumbling 9 percent over the last six months amid a trade dispute with the U.S. and concern over further monetary easing.

Capital outflow pressures are increasing, said Ken Cheung, a senior currency strategist at Mizuho Bank Ltd. This will persist “as long as there’s no major improvements in China-U.S. trade relations and the two nations’ monetary policies keep diverging. The PBOC may have to put efforts continuously in preventing the yuan from breaking 7 a dollar,” he said, referring to the People’s Bank of China.

China will take comprehensive measures to maintain a stable foreign exchange market, including cracking down on policy violations, SAFE said in a statement Thursday. The impact of trade tension on cross-border capital flows is controllable, the currency regulator added.

SAFE’s data came after the central bank reported the biggest drop in positions for foreign-exchange purchases since January 2017, reflecting greater outflows and intervention.

A policy tweak in August that made shorting the yuan with forwards more expensive may have helped cool demand for dollars in the derivatives market. Onshore lenders net bought foreign currencies in the forwards market from their customers for the first time in four months in September, according to SAFE data.

The onshore yuan fell 0.04 percent to 6.9450 per dollar as of 6:09 p.m., the weakest level since January 2017, while the offshore rate lost 0.16 percent.

To contact the reporter on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, David Watkins

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