China’s Move to Boost Outflows Shows It Can Bear Yuan Drops

(Bloomberg) -- The Chinese yuan’s worst month in a year isn’t daunting a government that wants to relax capital controls.

China boosted the quota for onshore institutions to buy overseas assets to $135 billion last month, the highest level on record, according to official data released Wednesday. That marks the third straight month that the State Administration of Foreign Exchange -- the country’s currency regulator -- raised the quota, the longest run of increases since 2018.

The move, which could encourage more capital outflows and hurt the yuan, was made even as the Chinese currency slid 1.3% in March on a stronger dollar and higher U.S. Treasury yields. On Thursday, the yuan extended declines, dropping as much as 0.4% to 6.5779 per dollar.

Behind the larger quota is a government that hopes to open up its capital borders as it seeks to integrate the financial system with the rest of the world. Also, relentless capital inflows into onshore bonds in the last few months have given officials the room to allow funds to leave.

“The authorities will make a lot more efforts in studying measures to further relax capital controls this year,” said Xing Zhaopeng, a senior China strategist at Australia and New Zealand Banking Group Ltd. “The increase in the quota suggests officials aren’t quite worried about the yuan’s recent weakness, which will likely be short-lived. The currency will stabilize in the longer term, when the strength in the dollar fades.”

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