Chinese yuan pressured by biggest capital exodus since 2016

Capital is exiting China at the fastest pace in more than seven years, piling extra pressure on the yuan.

The exodus has intensified in recent weeks as the nation’s teetering real estate industry casts a shadow over the world’s second-largest economy even after third-quarter growth surpassed economists’ expectations.

China’s currency regulator – the State Administration of Foreign Exchange – said on Friday (Oct 20) that onshore banks sold a net US$19.4 billion of foreign currencies to their clients last month, the most since November 2018, the height of the US-China trade war. Banks also sent a net US$53.9 billion overseas on behalf of their customers, the biggest monthly outflow since January 2016, shortly after policymakers engineered a depreciation of the currency in August 2015.

Goldman Sachs Group said it’s seeing a similar trend in its preferred gauge, which aggregates transactions in the onshore outright spot market, forward market and an official dataset that measures net payments of the yuan from onshore to offshore. Net outflows climbed to around US$75 billion in September, the most since late 2016 and an almost 80 per cent increase from August, the firm said in a report.

The outflows are placing downward pressure on the yuan, which has weakened this month in both offshore and onshore trading. The currency is less than 1 per cent away from this year’s lows reached in early September.

The shift in part reflects the divergence between interest rates abroad and those in China, where the central bank has been keeping them low in an effort to revive the economy. That’s widened the gap between US and Chinese yields to the most in over two decades.

“The unfavourable interest-rate spread between China and the US will likely imply persistent depreciation and outflow pressures in coming months,” Goldman analysts led by Maggie Wei and Hui Shan wrote in the note.