Chinese Yuan continues to weaken, fund outflows may persist

Chinese Yuan

China led its currency lower at its sharpest pace since June, partly reversing the yuan’s gains last week.

The People’s Bank of China (PBOC) set the yuan average at 6.9262, a sharp drop compared to its last fixing at 6.8668.

The yuan’s sharp slide was in part due to a spike downward in the U.S. dollar. Last week, the dollar index dipped as low as 101.300; from levels nearing 104 before popping back up to as 102.330 on Monday.

Daniel Morris, senior investment strategist at BNP Paribas Investment said that he expected that the resumed depreciation would complicate China's relationship with U.S. President-elect Donald Trump, who vowed during his campaign to label the country a currency manipulator for the purposes of a competitive trade advantage and threatened to impose a 45 percent tariff on its exports to the U.S. But Morris noted that the yuan was being driven by economic fundamentals, and not a manipulation for a trade advantage.

Dominic Schneider, head of commodity and Asia-Pacific foreign exchange at UBS Wealth Management, said that Chinese authorities want to have a stable currency, as evidenced by the yuan's stability against its trade-weighted basket in recent months. However, “The problem is the continuous outflow of capital will persist. It’s structural in nature and that’s going to burn the currency.” he added.

The weakening in yuan came amid fresh signs of fund outflows from the mainland. China reported that its foreign exchange reserves fell for a sixth straight month in December, declining by $41 billion for the month to $3.011 trillion, the lowest since early 2011.

"Capital outflow will be a multi-year process as private investors build holdings of offshore assets," said Patrick Bennett, a foreign-exchange strategist at CIBC. "This in and of itself should not be feared. But it will in the medium-term keep depreciation pressure on the yuan."


Leave a Reply

Your email address will not be published.