Yuan Heads Toward Six-Year Low as Capital Outflows Spur Weakness

(Bloomberg) -- The yuan traded near its lowest level in six years as the government struggles to plug loopholes in capital controls.

The exchange rate dropped by 0.05 percent to 6.7806 per dollar as of 5:15 p.m. in Shanghai, after a 0.3 percent slump on Monday that was the biggest in a month. The latest data show China's foreign-exchange reserves dropped last month by the most since January while exports plunged 7.3 percent, adding pressure for further currency weakness. The yuan slid for a sixth day against a basket of peers.

Officials have stepped up measures to curb outflows as investors seek to hedge against a weakening currency and traders ascribed a higher likelihood that Hillary Clinton will become the next U.S. president. In recent weeks China limited the use of UnionPay Co.'s cards to buy insurance products in Hong Kong, while Bloomberg News reported authorities are planning to curb transactions that use bitcoins to shift funds out of the country.

"The larger-than-expected drop in reserves underscores capital outflows in October, and as we know central banks also intervene in the forward markets, the reserves data are hardly likely to give a full picture of fund exits," said Fiona Lim, a senior currency strategist at Malayan Banking Bhd. in Singapore. "And there is wide expectation for the yuan to weaken against the dollar beyond the U.S. presidential election result. So all in all, risks to the yuan really are to the downside."

China's currency is trading within 0.1 percent of a fresh six-year low, while the offshore rate was 6.7940 a dollar. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 peers, has fallen 0.5 percent over the past six sessions to 93.71, the lowest level since the gauge was introduced last year.

Reserves dropped last month by $45.7 billion to $3.12 trillion, the lowest since 2011, the central bank said late Monday. Outbound shipments fell 7.3 percent in October, compared with the median estimate for a 6 percent decline in a Bloomberg survey.

Declines in the yuan have accelerated since the currency was included in the International Monetary Fund's reserves on Oct. 1 and increasing bets for higher U.S. interest rates bolstered the dollar. The yuan has slumped 1.6 percent this quarter, taking its loss over the past 12 months to 6.3 percent, the biggest drop in Asia.

A record $44.7 billion worth of yuan payments left the nation in September, according to the State Administration of Foreign Exchange. Goldman Sachs Group Inc. has warned such large cross-border moves can't be explained by market-driven factors and need to be taken into account when measuring currency outflows.

The central bank drained funds for a fifth day in open-market operations, pulling 145 billion yuan ($21.4 billion) from the financial system on Tuesday, data compiled by Bloomberg show. The overnight repurchase rate, a gauge of interbank funding availability, snapped a six-day decline, advancing three basis points to 2.11 percent, weighted average prices show. The yield on government bonds due in a decade was little changed at 2.77 percent, according to National Interbank Funding Center prices.

--With assistance from Helen Sun To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Philip Glamann, Robin Ganguly

With assistance from Tian Chen