China’s capital flight pressure eases

China’s currency regulator has claimed an early but cautious victory in its battle to stem the yuan’s capital flight, saying the country is coping “remarkably well” with the higher interest rates brought on by the US Federal Reserve.

Chinese commercial banks sold a net US$40.9 billion of foreign currencies in the first quarter, a 67.2 per cent decline from the same period in 2016, according to data by the State Administration of Foreign Exchange (SAFE). Chinese bank deposits denominated in foreign currencies rose by US$300 million in the first quarter, a slower pace than the US$11.2 billion increase in the same period in 2016, according to SAFE’s data.

The data indicate declining demand to convert the yuan into hard currencies amid easing expectation of the Chinese currency’s depreciation, said the regulator’s spokeswoman Wang Chunying, at a Thursday press briefing in Beijing. That’s vindication for the regulator’s draconian measures since last year to choke off capital flight and stem the yuan’s 7 per cent decline.

“China is more comfortable with the current stability, given that the market is already well prepared for the Fed rate increases, while the US dollar had been much weaker than expected so far,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The US and China seem to be comfortable with the present currency dynamics, as the focus for both economies is on the Korean peninsula. So this sort of stability will likely persist for a while, before new surprise kicks in.”

From Dalian Wanda’s US$1 billion acquisition of Dick Clark Productions to Country Gardens’ sales of villas in Malaysia to Chinese pensioners, a raft of China’s overseas trade, investments and acquisitions have been caught by the country’s currency dragnet.

 As outflow pressures eased since the first quarter, China last week scrapped a restriction on cross-border yuan payments imposed in early January, banking sources told the South China Morning Post.
SCMP

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