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Chinese Yuan Appears 'Unbreakable'

Chinese Yuan Appears 'Unbreakable'

The Chinese yuan seems unbreakable. Having started the year worth 6.51 to the dollar, it’s now trading at 6.58 to the dollar and one of country’s biggest banks doesn’t see it getting much weaker from here.

The Bank of Communications said in a note to clients on Tuesday that declines in net foreign exchange sales — from U.S. dollars to Hong Kong dollars and euros — means the market is not as worried about a further weakening of the yuan. No one is rushing for an exit.

Chinese banks reported a combined $12.5 billion of net foreign currency purchases in May, down 47% from April, official data showed on Monday. The Bank of Communications report argued that the drop off is mainly due to closer scrutiny over capital outflow by the People’s Bank of China.

 

Beijing has been opening up the country’s current account, allowing for Chinese businesses and individuals to take money abroad and invest in everything from real estate to financial securities. Many have taken advantage of this rule change in light of China’s slowing GDP growth. China’s burgeoning middle class, and its mega rich, have been mostly confined to Hong Kong and the mainland. But over the last few years, laws have allowed for them to take their cash elsewhere and they are doing so in greater numbers. As a result of that outflow, coupled with foreign portfolio outflows as well, the monetary authorities have put out constant warnings about clamping down on locals looking to take money out of China.

China’s careful monitoring and an active central bank, have kept the currency stable at a time when investment firms were figuring a 7 to 1 exchange rate was right around the corner. The dollar has gained only 1% against the yuan year-to-date ending June 20.

China changed its exchange rate rules in August 2015, changing the allowable trading band from 2% in either direction to 4% on any given day. The central bank also set the yuan’s value with reference to a basket of currencies instead of just the dollar. The move was a signal to investors that either China’s economy was weaker than anyone imagined and was desperate to throw exporters a lifeline with a weaker yuan, or that the yuan was only going to get weaker from herein.

No one really knew which way China was going. But since that time, the central bank has become more forthcoming in its rule changes, reducing market fears over yuan depreciation, the Bank of Communications analysts said in their report today.

Looking forward, the Bank of Communications is still forecasting capital outflows to continue in the near future. It blames market anticipation for rate hikes in the U.S. in July, an unlikely scenario, however. Brexit was also considered a fear-inducer; also an unlikely.

Chinese capital flight will pause once it becomes clear that the Fed won’t hike rates this year, the Bank says, but the more important thing to note is China’s economic outlook must improve in order for private sector companies to invest at home rather than abroad.

original source: http://www.forbes.com/sites/kenrapoza/2016/06/21/chinese-yuan-appears-unbreakable/#782cd6564e42

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