Regulator says investors are more upbeat on renminbi

Foreign currencies are placed next to 100 yuan banknote. [Photo/IC]

Investors are optimistic of a relatively stable renminbi in the long run amid easing pressure from capital outflows, according to China's top currency trade regulator.

Data from the State Administration of Foreign Exchange shows that the deficit from the buying and selling of foreign-currency forwards by Chinese banks shrank from $54.4 billion in January to $12.5 billion in May.

"The pressure of capital outflows has eased, and the deficit in the selling and buying of Chinese banks continues to shrink. For the first time in 17 months, China's banks bought more foreign-currency forwards than they sold," said Xie Yaxuan, chief economist with China Merchants Securities Company.

Banks bought 8.6 billion yuan ($1.3 billion) of forwards from customers last month, the first monthly net increase of forward foreign exchange since December 2014.

Capital outflows will tend to be more stable in the future, Xie predicted. "Investors have a brighter outlook for the renminbi in the long run and lower expectations there will be long-term depreciation."

Xie expected investors to be more rational in the face of fluctuating exchange rates, and not exhibit a strong reaction as they did at the beginning of the year.

In May, the renminbi depreciated against the US dollar by around 1.5 percent, which is about the same level as January, but that didn't lead to a significant selling of the renminbi, Xie said.

Lian Ping, chief economist with Bank of Communications, said that the overreaction in January stemmed from a false judgment at the end of the last year, when many investors believed that People's Bank of China, the central bank, would intervene so the renminbi would depreciate considerably.

"Investors will tend not to overreact in the future as the government has adopted stable policies," said Lian.

Lian said China does not face long-term pressure from capital outflows and there was no basis for continued depreciation in the long-run, because the fundamentals of the Chinese economy have yet to change. "The renminbi will basically remain at an equilibrium level," said Lian.

The central bank pledged to adopt a stable monetary policy this year and to create a moderate environment for structural reforms of the financial market.