Hong Kong helps relieve yuan pressures as mainland China grapples with capital outflows

As the yuan sees high levels of capital outflow, transfers from Hong Kong to mainland China have played a role in preventing concordant levels of depreciation

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Huang Yiping, a former member of the People’s Bank of China’s monetary policy committee, has touted Hong Kong as a potential platform for yuan trading and internationalisation. Photo: Weibo

Amanda Leein Hong KongandFrank Chenin Shanghai

Published: 4:00pm, 26 Jun 2024Updated: 4:13pm, 26 Jun 2024

The yuan is facing its highest level of capital outflow in eight years, according to new research, and data suggest a wave of offshore yuan remittances from Hong Kong to mainland China have helped offset some of the currency’s looming depreciation pressures.

China’s trailing 12-month net capital outflows stood at US$139 billion as of May 2024, the worst year for the figure since the period from 2016 to 2017, said the French investment bank Natixis in a presentation on Tuesday.

Firms are reluctant to convert their US dollar holdings into yuan, pushing the currency’s foreign settlement ratio down to 60 per cent last month – the metric’s lowest level since 2017, per Natixis. While China’s outward foreign direct investment grew over the past year, foreign direct investment to the mainland stagnated.

Large differentials between the interest rates of the US and China, weak confidence in China’s economic outlook and perceptions of geopolitical risk over using the yuan have contributed to the trend, the French investment bank said – and led to a slowdown in yuan internationalisation for the first half of 2024.

The key takeaway is that Hong Kong’s role as an offshore yuan centre has been used to support the yuan

Gary Ng

The yuan has dropped 2.3 per cent against the US dollar since the start of the year, and the People’s Bank of China – the country’s central bank – has in recent days been weakening its daily reference rate, 7.1248 today versus 7.1225 on Tuesday.

But data from Hong Kong, the world’s largest offshore yuan centre, tells a different story. A sizeable level of foreign currency conversion into the yuan has been observed there, as well as increasing remittances of yuan into mainland China despite growing depreciation pressures elsewhere, according to Gary Ng, a senior economist at Natixis.