China's Yuan Funds for Forex Drop for Third Straight Month
Zhang Yushuo
/SOURCE : yicai
China's Yuan Funds for Forex Drop for Third Straight Month

 

(Yicai Global) Nov. 23 -- China's balance of outstanding yuan for foreign exchange fell to CNY21.3 trillion (USD3.1 trillion) in October, marking the third straight month of decline.

The figure decreased by CNY91.6 billion (USD13 billion) during the month, extending an almost CNY120 billion fall in September, data from the People's Bank of China shows. Changes in the balance, as with forex reserves, suggest central bank intervention in the currency market -- increasing the balance means greater market liquidity.

Liquidity in the banking system is sufficient, the central bank said yesterday, which marked 20 straight days that PBOC had not conducted a reverse repo -- the longest it has gone without since early 2016, when it started carrying out open market operations every day instead of twice a week. The streak continued today.

Outstanding yuan for forex is the currency held by PBOC that pays for foreign currency assets, such as the dollar. As the redback is not freely convertible under the capital account, the central bank has to purchase foreign currency generated by China's trade surplus and foreign investment in the country, adding funds to the money market.

The balance had increased continuously for years due to the mandatory forex settlement system and a stream of money flowing into the country, but the funds have begun to decline since the dollar rallied and China's State Administration of Foreign Exchange allowed foreign companies to deposit foreign currencies into their capital accounts, under the willingness exchange settlement.

The last time the funds experienced a drop as large as CNY100 billion was early 2017, when the yuan took a hit against the dollar.

China's forex reserves have been in similar form, decreasing by USD8.2 billion, USD2.3 billion and USD3.4 billion in August, September and October, when the balance hit an 18 month low.

But forex settlements and sales are improving. The deficit at banks in October was CNY20 billion, 83 percent less than in September, according to data from SAFE, which said China's cross-border capital flows are mostly stable and supply and demand on the forex market are balanced.

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Keywords: PBOC