Why Chinese Banks Are Selling Dollars To Corporates

Corporates offloading Chinese renminbi overseas have local banks scrambling to stunt the outflow of local currency, according to reports.

For the fifth day in a row, state-run banks in China have sold dollars to counter corporate offloading of renminbi, reports said Sunday (Dec. 4). Companies are dumping renminbi in response to its ongoing devaluation against the U.S. dollar, reports noted.

“The dollar’s retreat overseas offered a chance for the yuan to firm slightly, but the overall trend for the yuan to depreciate has not changed,” one trader at a Chinese bank told Reuters last week. The yuan’s value has declined by nearly 6 percent against the U.S. dollar in 2016, reports said. And while China’s economy is beginning to stabilize, that drop has heightened fears that outflows of yuan will continue.

Separate reports by Forbes said this year’s capital outflow will likely hit levels seen last year thanks to both legal and “surreptitious” outbound transfers.

Earlier this year, regulators in Hong Kong moved to stunt the outflow of capital from China that can occur through the deployment of fraudulent invoices and money laundering.

Next month, China’s cap of $50,000, the limit at which individuals can convert foreign currency into yuan, will reset. That could lead to a new surge in capital outflow, some analysts said.

“If just 1 percent of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion,” calculated Bloomberg earlier this month. The publication has estimated that $620 billion in yuan has already flowed out of China in the first 10 months of 2016.

As the yuan’s slip in value against the U.S. dollar continues, reports said Chinese individuals have been converting their yuan into other currencies. Analysts say capital controls, the use of forex reserves to prop up the yuan and the allowance of currency depreciation are three options already deployed by China.