Chinese Households Shrug Off Weakness Fears to Embrace Yuan

(Bloomberg) -- A group of once-prominent yuan bears has gone missing.

China’s individual or household investors, who in 2016 dumped the yuan to buy dollars amid a plunge in the exchange rate, have held their nerve this year despite declines in the Chinese currency, data compiled by Bloomberg show.

The yuan has been Asia’s worst performer since the end of March, but there is no sign of the kind of panic exhibited by the exodus of capital after China’s surprise yuan devaluation in 2015. Individual investors are also less keen on holding onto the dollar than they were during that time -- foreign-exchange deposits at banks fell the most since August 2017 last month, according to official data.

"Investors see the yuan being much more stable compared with a few years ago, and they lack the incentive to buy the dollars now as they don’t have many high-yielding products to buy onshore with foreign exchange," said Eddie Cheung, Asia foreign-exchange strategist at Standard Chartered Plc in Hong Kong. "The yuan will weaken moderately as uncertainties over the trade war linger, without triggering major panic."

A gauge reflecting households’ willingness to buy dollars declined to 90 percent last month from a record high of 140 percent in January 2016, according to data compiled by Bloomberg. A level above 100 percent could indicate investors are getting more foreign currency than they would usually need to pay for regular expenditures like overseas travel. Another gauge showed that people are more interested in purchasing the yuan this year compared with late 2017.

The indicators are calculated by dividing the amount of foreign currency that banks bought or sold for their clients in a certain month, by the sum of cross-border payments or receipts the lenders conducted for the customers in the same period. The State Administration of Foreign Exchange data are sourced from the service portion under the current account, where large parts of individuals’ dollar-purchases are often recorded as travel or overseas education.

Chinese households have increased dollar selling in recent months, on bets the depreciation in the yuan is close to an end, according to the head of trading at a joint-stock bank. Individual investors boosted yuan purchases significantly in July, said two other people who work in foreign-exchange departments at mainland banks. They asked not to be named as they are not allowed to talk about their business publicly.

Investors have also been reassured by moves from the People’s Bank of China. Officials this week pledged to keep the currency stable, after moving earlier this month to make shorting more expensive.

Tougher administrative measures are another reason why individuals are less willing to buy foreign currencies. People are limited to converting $50,000 per person a year, but the process became more complicated as officials tightened rules at the start of last year -- when bearish sentiment reached a peak.

The yuan then staged a comeback, posting its biggest annual advance in almost a decade in 2017 before hitting headwinds of trade tensions and a slowing economy. The currency touched its weakest level in 19 months last week. It fell 0.17 percent to 6.8868 per dollar as of 9:55 a.m. in Shanghai on Friday.

"A lot of individual investors got hurt due to the yuan’s rally last year," said Li Liuyang, a senior analyst at China Merchants Bank Co. in Shenzhen. "They are not willing to do that again."

To contact Bloomberg News staff for this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Ran Li in Beijing at rli279@bloomberg.net

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

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With assistance from Editorial Board