Offshor yuan market activity in June fell by its biggest margin in more than four years due to a slump in trade deals and a flat exchange rate, Standard Chartered Bank said yesterday.

The Renminbi Global Index, which measures the extent of the yuan’s internationalization through offshore business activities, dropped 2.8 percent month-on-month to 2,145 points, its largest monthly decline since the gauge was launched in December 2010. It has dropped for three consecutive months.

The main drag was the weakness in yuan transactions and a flat exchange rate, which masked an otherwise steady offshore yuan market, which included a positive contribution from Hong Kong and Taiwain deposits, the report said.

The People’s Bank of China sought to stifle currency volatility in the second quarter, especially after the stock market slump in June, in a bid to stabilize cross-border yuan movement, where there was outflow pressure in the first quarter.

Central bank data released yesterday showed that the country’s foreign exchange reserves fell by US$42.5 billion in July, their third straight monthly drop, supporting speculation that the monetary authority had interfered in the foreign exchange market.

Since March, the yuan-US dollar spot rate has been fairly static around the 6.20 level, after moving between 6.18 and 6.28 in the first quarter.

That said, a State Council statement in July made reference to a widening of the yuan-US dollar trading band and even hinted at greater tolerance for a depreciation of the yuan as a way to boost trade.

Domestic and foreign firms, including China International Capital Corp and Deutsche Bank, expect China to widen the yuan’s trading band against the dollar to 3 percent, from 2 percent at present, in the near future as part of its market-oriented reform agenda.

“The impact of the recent China stock market volatility on offshore yuan activity and sentiment is uncertain, but we have seen no material loss in momentum so far,” Standard Chartered economists said in the report.

“If anything, renewed band-widening talk has boosted offshore turnover. We believe China remains committed to capital account opening,” it said.

Offshore yuan activities picked up in July, setting a positive tone for the index into the third quarter, it said.

                                                                                    An excerpt from Shanghaidaily.com