State regulators call yuan's dip 'normal'

Chinese foreign exchange regulators said Wednesday that massive capital outflow was "improbable" as the yuan snapped a six-day losing streak that had stirred concerns about the currency's stability.

The recent fluctuation is "normal", the State Administration of Foreign Exchange said in a statement on its website. "Reading too much into it is unnecessary," it added.

The central bank on Wednesday set the yuan's reference rate 5 basis points higher from a day earlier at 6.1184 yuan per dollar. Tuesday's 0.46 percent drop was the biggest one-day slide since Nov 1, 2010, and made for a total decline of 1 percent since Feb 17.

Going forward, SAFE said that fewer interventions, greater volatility and two-way moves will be a new "norm" for the yuan, which had until recently enjoyed a decade-long trend of steady appreciation.

"Market players should embrace the new norm and adapt to it," said SAFE.

In fact, foreign exchange liberalization is at the top of China's financial reform agenda, because Beijing believes that a free-floating yuan will rebalance the country's international debt and mitigate financial risks. Currently, the yuan is allowed to float only 1 percent from the daily reference rate set by the People's Bank of China, the central bank.

Many fear that the yuan's two-way float will drive away funds attracted to China by the yuan's appreciation, but SAFE said massive outflow is unlikely because most foreign investment in China is long-term and China has assets held in reserve to help mitigate risks.

Dariusz Kowalczyk, a Hong Kong-based economist with Credit Agricole CIB, wrote in a research note on Wednesday that a band of 1.5 to 2 percent may be established soon, possibly within weeks.

But the yuan's appreciation trend is intact, he added, holding to a 2014 target of six yuan per dollar. "At least half of the move lower is behind us, and its pace should slow," he said, adding that 6.15 "is probable in the near term, but 6.20 is unlikely barring band widening."

Capital inflow to China strengthened in January as disappointing home sales and consumer confidence data raised expectations that a massive asset purchasing program that sends funds into emerging markets would be cut back.

Chinese banks registered a $73.3 billion surplus in spot foreign exchange settlements in January and a $25.4 billion surplus in forward currency settlements.

Strong trade figures in January partly explain the inflow. The country's trade surplus rose to $31.9 billion that month, well above forecasts of $23.7 billion and December's $25.6 billion. Remittances by overseas workers ahead of the Lunar New Year and bets on the yuan's appreciation also played a role, SAFE said.

Australia and New Zealand Banking Group Ltd said in a report released Wednesday that China should encourage two-way capital flows, rather than directly intervening by adjusting the fixing.

"By allowing two-way flows, onshore corporates and residents will be able to convert renminbi into foreign currencies, thus allowing the foreign exchange market to restore its balance," the bank said.