Chinese enterprises and individuals are willing to hold foreign currency in anticipation of the depreciation of the yuan, but the top regulator said that does not equal a massive capital flight.
Statistics released by the State Administration of Foreign Exchange on Oct 22 showed China’s commercial banks sold a net 729.6 billion yuan ($114.9 billion) of foreign exchange on behalf of clients in September, cooling from August’s 807 billion yuan but still the second highest this year.
By comparison, in the second quarter banks just sold a net $4.6 billion on a monthly average level, while the figure in the third quarter was $65.4 billion, showing that favor for the US dollar (and aversion for the yuan) has not waned.
However, the deputy head of the State Administration of Foreign Exchange, Wang Xiaoyi, told a news conference on Oct 22 that the money outflows are “normal” and not a sign of panicked capital flight, and that China is confident in keeping international payments and receipts balanced.
“When companies receive foreign currencies, they are not destined to spend them overseas. They can use them to pay for imported goods, repay their onshore forex debt, or deposit them in domestic banks,” Wang said. Enterprises also showed a greater willingness for outbound investment, which does not equate to panic-induced capital outflow, he said.
That said, China has announced some measures to curb yuan speculation. Wang said China is considering forex transaction fees to curb large, short-term cross-border capital flows. Central bank Deputy Governor Yi Gang made the same proposal in early October to deter currency speculators.
Wang also defended the central bank’s intervention to keep the yuan steady after the yuan depreciated by 1.9 percent on Aug 11, triggering investors to bet against it. Now the market has returned to calm.
“Expectations have stabilized and the market believes the economic fundamentals do not support long-term depreciation, so arbitrage eased,” he said. The yuan has strengthened 1.6 percent since a record low on Aug 12.