Chinese banks grappled with net capital outflows of US$109 billion in the first quarter and money could continue to trickle out in the absence of real incentives to hold renminbi positions.
Reuters is citing the Bank for International Settlements (BIS) which said the Chinese renminbi is under pressure as a result of capital flight.
“These results offer clues as to what may happen in the third quarter, during which China changed its exchange rate policy,” BIS said
China devalued the renminbi on Aug. 11 and has been spending heavily to hold the currency steady onshore as fears have grown that the economy is in worse shape than previously thought.
Central bank reserves fell by a record US$94 billion in August and authorities this week instructed banks to bolster management of foreign exchange transactions and pay attention to suspicious transactions.
BIS said pressure on the yuan had been building since the first quarter as a cut in deposit rates and a slight depreciation in mid-March reduced incentives to hold the local currency.
“As a result, option-implied currency volatility rose. In short, the interest rate differential narrowed and the cost of insuring against further depreciation increased, reducing incentives for the long-renminbi position,” BIS said.
It said companies wishing to reduce yuan exposure had likely boosted hard currency deposits at Chinese banks – indeed central bank data shows such deposits grew by a net US$49 billion in the first quarter.
Meanwhile, yuan-denominated deposits held by the rest of the world at Chinese banks fell, amounting to a net outflow of almost US$109 billion, the report said.
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