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Yuan heads toward six-year low as capital outflows fuel weakness

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The yuan weakened toward its lowest level in six years as the greenback strengthened and the government struggled to plug loopholes in capital controls.

[BEIJING] The yuan weakened toward its lowest level in six years as the greenback strengthened and the government struggled to plug loopholes in capital controls.

The exchange rate fell 0.03 per cent to 6.7788 per US dollar at 12:04pm local time, extending a 0.3 per cent slump on Monday that was the biggest in a month. The latest data show China's foreign-exchange reserves dropped last month by the most since January while exports plunged 7.3 per cent, adding pressure for further currency weakness. The yuan slid for a sixth day against a basket of peers.

Officials have stepped up measures to curb outflows as investors seek to hedge against a weakening currency and traders ascribed a higher likelihood that Hillary Clinton will become the next US president, boosting the US dollar.

In recent weeks China limited the use of UnionPay Co's cards to buy insurance products in Hong Kong, while Bloomberg News reported authorities are planning to curb transactions that use bitcoins to shift funds out of the country.

Market voices on:

"The larger-than-expected drop in reserves underscores capital outflows in October, and as we know central banks also intervene in the forward markets, the reserves data are hardly likely to give a full picture of fund exits," said Fiona Lim, a senior currency strategist at Malayan Banking Bhd in Singapore.

"And there is wide expectation for the yuan to weaken against the dollar beyond the US presidential election result. So all in all, risks to the yuan really are to the downside."

China's currency is trading within 0.1 per cent of a fresh six-year low, while the offshore rate was at 6.7901. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 peers, has fallen 0.5 per cent over the past six sessions to 93.71, the lowest level since the gauge was introduced last year.

Reserves dropped last month by US$45.7 billion to US$3.12 trillion, the lowest since 2011, the central bank said late Monday. Outbound shipments fell 7.3 per cent in October, compared with the median estimate for a 6 per cent decline in a Bloomberg survey.

Declines in the yuan have accelerated since the currency was included in the International Monetary Fund's reserves on Oct 1 and increasing bets for higher US interest rates bolstered the US dollar. The yuan has slumped 1.6 per cent this quarter, taking its loss over the past 12 months to 6.3 per cent, the biggest drop in Asia.

A record US$44.7 billion worth of yuan payments left the nation in September, according to the State Administration of Foreign Exchange. Goldman Sachs Group Inc has warned such large cross-border moves can't be explained by market-driven factors and need to be taken into account when measuring currency outflows.

Money Markets

The central bank drained funds for a fifth day in open-market operations, pulling 145 billion yuan (S$29.74 billion) from the financial system on Tuesday, data compiled by Bloomberg show.

The overnight repurchase rate, a gauge of interbank funding availability, snapped a six-day decline, advancing three basis points to 2.11 per cent, weighted average prices show.

Government bonds declined, with the yield on notes due in a decade rising one basis point to 2.78 per cent, the highest since Sept 18, according to National Interbank Funding Center prices.