Published: Sat, January 07, 2017
Business | By Patricia Jimenez

Yuan Surges Against Dollar as China Tightens Capital Control

Yuan Surges Against Dollar as China Tightens Capital Control

In the spot market, the yuan opened at 6.9565 per United States dollar and was changing hands at 6.9553 at midday, 75 pips stronger than the previous close and 0.04 per cent weaker than the midpoint.

The People's Bank of China (PBOC) drained a net 245 billion yuan from the market through open market operations last week. Though the central bank can not control offshore trading as tightly, rates usually remain similar to onshore trading rates.

America's dollar was lower against all the majors too, with cable rising 0.78% to 1.2420, euro/dollar gaining 0.98% to 1.0588 and dollar/yen lower by 1.43% to 115.67.

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It was a much-needed cooldown for Chinese regulators after the offshore yuan shot above 6.97 this week amid persistent short-selling. On Thursday the dollar was trading at 6.8860 yuan, which also reflected the currency's onshore rise. Yesterday, the yuan rose by nearly 0.9 percent, the highest since last January, when it rose by 1.46 percent in a single day.

China only allows the tightly controlled yuan to rise or fall two percent on either side of the daily fix, to prevent volatility and maintain control over the currency.

China is believed to have intervened in foreign exchange markets this week to shore up the sliding yuan, sparking speculation it wants a firm grip on the currency ahead of U.S. President-elect Donald Trump's inauguration on January 20.

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The cost of borrowing yuan in Hong Kong surged.

There is of course another way to read the tea leaves when it comes to the China, its currency and particularly the capital flight that has been and will most likely continue to put pressure on the country's reserves.

"We know the capital controls aren't working because that's why they're having to raise the overnight deposit rate so aggressively by the PBOC, which is still basically the guiding hand in the offshore yuan market", said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

"The yuan fixing was stronger than expected today, and also state banks continue to offer U.S. dollars in the market", the trader said.

Analysts say Beijing still faces a struggle to arrest the yuan's descent.

That is likely to propel USA bond yields and the dollar higher, in turn denting currencies around the world.

"In all, we foresee depreciation pressures on the yuan to return eventually and send the U.S. dollar-yuan towards 7.16 by the end of 2017", the team added.

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