China Posts Biggest Monthly Net Forex Sale in 2 Years
China’s commercial banks sold a net $19.3 billion of foreign exchange in June, the biggest monthly net forex sale in two years, reflecting trade-related pressure on the yuan.
Banks bought $142.3 billion of foreign currencies while selling $161.6 billion last month, resulting in the biggest monthly deficit since June 2017, data from the State Administration of Foreign Exchange (SAFE) showed Thursday.
China’s yuan has been under pressure against the dollar since May over renewed trade tensions with the United States. The yuan fell 2.54% against the dollar in May, the biggest monthly drop since August 2018. The currency rebounded 0.36% against the dollar in June.
At a news briefing, SAFE spokeswoman Wang Chunying also said China’s further opening of its domestic market will have a positive impact on cross-border capital flows. SAFE will reform the Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII) programs to expand the scope of permitted investment by foreigners in China’s capital markets, and the regulator is considering relaxing or scrapping the QFII quota, she said.
Forex supply and demand were relative balanced, and the monthly fluctuations were mainly affected by businesses selling foreign currencies at highs and buying on dips, Wang said at the news briefing.
The large forex deficit in June was mainly related to depreciation and expected depreciation of the Chinese currency, said Zhao Qingming, chief economist of the derivative institute of the China Financial Futures Exchange. Chinese businesses tend to increase purchases of foreign currencies and step up repaying loans in foreign currencies when they expect the yuan to decline, Zhao said.
When the depreciation first occurs, businesses usually rush to sell forex holdings; as declines continue when the market considers that the downward trend is established, businesses will increase purchases of foreign currencies, said Wang Youxin, a researcher with the Institute of International Finance at the Bank of China.
Seasonal factors also played a large role in the June deficit, Wang Youxin said. Businesses usually need to buy foreign currencies for dividend payments in the middle of the year, and foreign exchange demand for traveling and studying abroad also picks up as summer comes, he said.
In the first half of the year, net forex sales stood at $33.2 billion. Banks bought $888.3 billion of foreign currencies and sold $921.6 billion from January to June.
The monthly average deficit for the first half narrowed by 52% compared with the second half of 2018. After taking factors such as forward settlements and options trading into consideration, the supply and demand in the foreign exchange market are basically in balance, the SAFE spokeswoman said.
The impact of current trade tensions on China’s cross-border capital flows is generally under control, SAFE’s Wang said. Forex market sentiment has remained stable and market players’ behavior is rational, she said.
Looking ahead, the relative easing of the worldwide monetary environment and the widening interest spread between China and the U.S. would be more favorable for the stability of China's foreign exchange market, the spokeswoman said.
China is expected to post a surplus in its current account in the second quarter of this year and a small surplus for all of 2019, she said.
The international market as a whole is still optimistic about China’s economy, based on the relatively low prices of China’s credit default swaps (CDSs) on government bonds, SAFE’s Wang said. CDSs are essentially insurance contracts against default, priced in basis points, or hundredths of a percentage point, relative to the debt’s principal amount.
China five-year credit default swaps recently stood at about 40 basis points, down from a peak of nearly 150 basis points at the beginning of 2016. The higher the CDS price, the higher the market estimate of the risk of default.
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