MNI POLICY: China at Risk of Cap Outflow as Yuan Depreciates

--Banks' Clients Still Net Buyers Of Forex, Forex Forwards

     BEIJING (MNI) - The Chinese yuan slumped to a one-year low on Thursday,

driven lower by concerns surrounding the ongoing trade conflict between

Washington and Beijing, and raising fears of an acceleration in capital

outflows.

     Chinese banks were net purchasers of foreign currency for their clients in

June, data from the State Administration of Foreign Exchange (SAFE) show.

However, total forex purchases plummeted by 89.4% from May's level to CNY13.1bn.

     Moreover, in terms of forward contracts, banks were net forex buyers on

behalf of their clients in June, suggesting that market participants are betting

on a weaker yuan in the longer term. Indeed, purchases of forex forward

contracts totalled CNY88.7bn, reversing a net sale of CNY10.6bn in May.

     Wang Chunying, a SAFE spokeswoman, said that the regulator continues to

strengthen the management of cross-border capital flows by using measures to

attract foreign capital and by keeping the market under tight control.

     --"TWO-WAY" MARKET OPENING

     China "promotes two-way financial market opening to serve the country's

comprehensive opening up," Wang said.

     "There's large potential" to attract foreign investments into Chinese

equities and bonds given their higher return relative to western peers, she

added.

     Regulators will also improve both macro-prudential management as well as

"micro" scrutiny on the legitimacy of forex transactions, Wang said.

     Asked whether the trade spat with the U.S. increased outflow pressure, Wang

acknowledged that volatility in the forex market increased since June 25. But

the daily capital outflow has only been about 12% of the peaks experienced in

2015 and 2016, she pointed out.

     --SOUND FUNDAMENTALS

     In addition to the opening up of the forex market, sound economic

fundamentals, adequate forex reserves and ample policy tools serve to hedge

against outflow pressures, Wang said.

     Other key points made by Wang:

     - On the reduction in China's forex reserves (to $3.1121tn at the end of

June -- $27.8bn less than a year ago): Wang attributed the decline to valuation

effects.

     - On China's current account swinging into deficit at the end of Q1: Wang

pointed out that as it is within 5% of GDP, it is considered to be at an

early-stage warning level. China's quarterly surpluses have been as low as 0.5%

of GDP in 2016 and 2017, so it's "normal" enter deficit territory. Nevertheless,

China's robust manufacturing sector activity means that the deficit will not be

long-running and will not be large in size.

     - On whether further U.S. interest rate hikes add pressure to capital

outflows from China: Wang said that China's solid economic outlook, healthy

return on investments and the yuan's strength against a number of major

currencies are factors which outweigh the impact of higher U.S. rates.

     - On China's foreign debt, which increased by $132.9bn from end-2017 to

$1.84tn at the end of Q1: Wang said that the increase is reflective of greater

confidence in China among foreign investors, and she expects the foreign debt

level to increase further in Q2.

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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