SHANGHAI (Reuters) – Chinese authorities are rolling out fresh measures to limit capital flight, including increased scrutiny of overseas investments, as the yuan currency comes under mounting pressure.
President Donald Trump’s tariffs threats are heightening Sino-U.S. tensions and discouraging inbound foreign investment. The yuan has lost 2.2% to the dollar since Trump’s election win in November.
China has increased scrutiny of overseas investments by domestic companies and their use of proceeds from Hong Kong share sales, Bloomberg reported citing unidentified sources this week.
Meanwhile, China’s commercial banks sold the most foreign exchange to their clients since July last month, official data showed, showing rising demand for foreign currency. The conversion ratio – a gauge that measures households and corporates’ willingness to sell dollars for yuan – fell to the lowest level in seven months.
Xinquan Chen, an economist at Goldman Sachs, said the current account showed sizeable currency outflows in January.
The wide gap between higher U.S. interest rates and falling Chinese yields has been a factor eroding the yuan’s appeal with onshore investors. That yield gap hit its widest-ever level in January.
“Weak domestic demand and low interest rates present major structural headwinds for the yuan,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
Dollar supplies onshore, too, have fallen as more businesses borrow cheaply in yuan. Outstanding foreign exchange loans fell to their lowest level in over 13 years in January, while foreign exchange deposits grew to the highest level since April 2023.
Lynn Song, chief economist for Greater China at ING, said the uptick in FX deposits at the start of the year is seasonal. But “until or unless there’s a sustainable turnaround in investor confidence, FX deposits are likely to move higher overall this year.”
The People’s Bank of China (PBOC) has been guiding its daily official midpoint yuan guidance stronger than market expectations since mid-November, which markets interpret as a sign of unease over the yuan’s decline.
China’s major state-owned banks, too, have been constantly seen selling dollars to support the currency.
Their support for the yuan and the expectation China will not let the currency weaken sharply have anchored yuan values in the forwards market, for now.
(Reporting by Shanghai Newsroom; Editing by Vidya Ranganathan and Kim Coghill)
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