MNI 5 Things: China Capital Outflow Pressures Up On Weak Yuan

     BEIJING (MNI) - China banks increased their net selling of foreign exchange

to their clients in July, a sign that capital outflow pressures rose as the yuan

weakened at a rapid pace, according to the latest data from the State

Administration of Foreign Exchange, released Friday.

     --The foreign exchange regulator said banks sold a net CNY2.9 billion in

foreign currency to clients in July, the first net sale since March, compared

with a CNY47.3 billion of net purchase in June. The number is treated as a key

indicator of the level of capital flows into and out of the country. The greater

the net sale number, the larger the outflow.

     --The regulator said market players were more willing to sell their forex

income to banks in July, noting the forex sales ratio of banks' clients,

measuring clients' forex sales as a proportion of their forex incomes, was 73%

for the month, 3 percentage points higher than in June. The forex purchase ratio

of clients was 67%, up 3 percentage points compared to June.

     --In terms of forward contracts, banks were net forex sellers on behalf of

their clients in July, suggesting market participants are betting on a weaker

yuan in the longer term. Indeed, banks' net sales of forex forward contracts

totalled CNY102.8 billion, compared with a net purchase of CNY88.7 billion last

month.

     --Banks total net forex sales, including both transactions with clients and

banks' proprietary trading desks, was a net CNY63 billion in July, SAFE said,

compared with a net purchase of CNY13.1 billion in July. For the first 7 months

of the year, banks  purchased a net total CNY25.1 billion, while purchasing a

net of CNY268.5 billion from clients.

     --China has imposed stricter capital controls as the yuan's sharp

depreciation has weighed on capital outflow. The PBOC restarted a 20% reserve

requirement on FX forward purchases on Aug 6 to raise the cost of shorting the

yuan. Additionally, China News Service, a state-owned news wire, reported the

central bank had closed off channels used to deposit and lend yuan offshore

through the trade zones on Thursday to tighten offshore yuan liquidity. More

capital control measures are expected to be seen as the capital outflow pressure

picks up, as a former senior PBOC advisor told MNI in an interview published on

Aug. 15 (MNI: China Needs FX Capital Control: Ex-PBOC Advisor).

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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