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Tuesday, June 21, 2016, 17:30

Forex sales dip marks more faith in yuan

By Xinhua

BEIJING - Chinese banks sold a net US$12.5 billion in May, down 47 percent from April, the fifth-straight decline this year, data from the State Administration of Foreign Exchange (SAFE) showed.

Commercial banks bought more foreign-currency forwards than they sold in May for the first time since December 2014, and companies and individuals are less willing to hold forex, official data showed.

A further decline in Chinese banks' net foreign exchange (forex) sales points to reduced negative sentiment over the weakening of the yuan against the US dollar, feel analysts.

"Market expectations on the yuan's one-way depreciation are weakening," said Lian Ping, chief economist of the Bank of Communications. "Investors have gradually got used to two-way fluctuations of the currency and are less motivated to buy foreign currency."

Despite the yuan slipping by around 1.5 percent against the dollar last month, investors are optimistic about the longer term due to China's sound economic fundamentals, uncertainties over the US interest rate hike and Britain's possible EU exit.

On Tuesday, the yuan's central parity rate, or the fixing rate, strengthened by 52 basis points to 6.5656 against the dollar.

The currency is likely to rebound strongly in the third quarter of the year, said Xie Yaxuan, an analyst with China Merchant Securities.

"The dollar is expected to soften after the Federal Reserve makes its final [rate hike] decision, and new demand for the yuan will be created thanks to expected trade surplus in the second half, the currency's inclusion into the reserve of the International Monetary Fund [basket of currencies] and further opening up of China's forex and bond markets," Xie said.

China overhauled its exchange rate mechanism in August 2015, making it more market-based and setting the yuan's value with more reference to a basket of currencies instead of the dollar alone.

Initially, however, the move caused market jitters and set off a downward adjustment of the yuan, adding to the pressure of capital outflow amid a slowing economy.

Responding to the situation, since the beginning of this year, the central bank has increased transparency of the new mechanism and enhanced communication with the market to reduce fears over depreciation.

SAFE said the new forex sales data, which exceeded market expectations, suggests the pressure of cross-border capital outflow is gradually abating and the forex market is heading toward a more balanced level.

Looking forward, China's capital outflow pressure, although likely to remain in the near future, will continue to ease after the US makes a decision on its potential rate hike and China's economic outlook remains bright, according to Lian.

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