China banks’ Q1 capital outflow $109 b, may persist: BIS

LONDON (Reuters): Chinese banks saw net capital outflows of $109 billion in the first quarter of 2015 and weak incentives to hold renmimbi positions indicate capital may keep trickling out, a BIS report said.

In its quarterly review, the Bank for International Settlements said that international banking statistics showed the money had flowed from banks inside China to overseas banks, putting downward pressure on the currency. “These results offer clues as to what may happen in the third quarter, during which China changed its exchange rate policy,” BIS said

China devalued the yuan - or renmimbi - on Aug. 11 and has been spending heavily to hold the currency steady onshore as fears have grown that the economy is in worse shape than previously thought. Central bank reserves declined by a record $94 billion in August and authorities this week instructed banks to bolster management of foreign exchange transactions and pay attention to suspicious transactions. BIS said pressure on the yuan had been building since the first quarter as a cut in deposit rates and a slight depreciation in mid-March reduced incentives to hold the local currency.

“As a result, option-implied currency volatility rose. In short, the interest rate differential narrowed and the cost of insuring against further depreciation increased, reducing incentives for the long-renminbi position,” BIS added.

It explained that companies wishing to reduce yuan exposure had likely boosted hard currency deposits at Chinese banks - indeed central bank data shows such deposits grew by a net $49 billion in the first quarter.

Meanwhile yuan-denominated deposits held by the rest of the world at Chinese banks fell, amounting to a net outflow of almost $109 billion, the report added. While yuan deposits partially recovered in the second quarter, thanks to exchange rate stability, the BIS said incentives to hold yuan were reduced again in the third quarter as authorities cut deposit rates and implemented a devaluation.

It added there was evidence of some offshore renminbi deposits being liquidated. “At the height of the recent equity and exchange market turbulence, the offshore renminbi interbank interest rates in Hong Kong reached the unprecedented levels of 10.1% for the one-week and 8.6% for the one-month tenor, reinforcing reports of renminbi selling,” the report added.

China to let foreign c.banks trade in forex market

BEIJING (Reuters): China will allow foreign central banks to trade in its spot interbank foreign exchange market and trade currency derivatives such as swaps and forwards, the central bank said on Monday.

The central bank also commented on a big discrepancy of 405.4 billion yuan between two sets of official data that are proxy indicators of the demand for foreign currencies in China.

In an online question and answer statement, the central bank said the gap was due to “ample” foreign exchange liquidity in the banking system. A Reuters calculation of central bank data released on Monday showed China’s financial institutions sold a net 723.8 billion yuan ($113.69 billion) of foreign exchange in August, the largest outflow on record.

But separate central bank data showed the bank sold a net 318.4 billion yuan of foreign exchange last month.