China outflows rising in both yuan payments, forex: Goldman Sachs

[BEIJING] China's capital outflows are accelerating and the central bank is selling larger amounts of foreign exchange, Goldman Sachs Group Inc warned as the yuan headed for its biggest annual decline in more than 20 years.

A net US$69.2 billion exited the nation in November, compared with a monthly pace of around US$50 billion since June, Goldman economists led by Hong Kong-based MK Tang wrote in a note Friday. Money has been leaving in yuan payments for 14 consecutive months, while the central bank's yuan positions have slumped the most since January. The situation could get worse, said Banny Lam, head of research at CEB International Investment Ltd.

"Capital outflows and yuan depreciation will continue or even worsen by the end of this year and the first quarter of 2017, as investors are getting increasingly concerned about a stronger dollar and China's economic conditions," said Hong Kong-based Lam. "The yuan will reach 7 very soon. Policymakers will keep tight capital control in the near term but will continue to internationalise the currency in the long term." The equivalent of US$33.6 billion exited China via yuan payments last month, compared with US$29 billion in October, according to the State Administration of Foreign Exchange. The monetary authority's yuan positions - which reflect the amount of foreign currency held on its balance sheet - slumped by 383 billion yuan (S$80 billion) in November, PBOC data showed. A total of US$1.1 trillion of foreign currency has left China since August 2015, when China devalued the yuan, according to Goldman.

In the spot market, the offshore yuan spiked higher after the PBOC strengthened its daily fixing, which limits onshore moves to 2 per cent on either side. The monetary authority raised the rate by 0.28 per cent, the most in nine sessions, to 6.9312 per dollar on Monday. That was stronger than Oversea-Chinese Banking Corp.'s prediction of 6.9463 and Mizuho Bank Ltd's projection of about 6.9600."The fixing was very, very strong," said Ken Cheung, Hong Kong-based Asia currency strategist at Mizuho. "The PBOC is sending a signal that it wants to slow the depreciation pace when the onshore sentiment has been deteriorating quickly and capital is leaving the nation quickly." The offshore yuan surged 0.36 per cent to 6.9424 per dollar as of 2:01 pm in Hong Kong, while the onshore rate gained 0.1 per cent. The Chinese currency traded in Shanghai is heading for a loss of 6.7 per cent for this year, the most since 1994.

Ten-year government bonds fell, with the yield rising 5 basis points to 3.4 per cent. One-year interest-rate swaps rose 5 basis points to 3.5 per cent.

BLOOMBERG