Beijing ditches deleveraging, posing hit to yuan

TOKYO: China’s moves to boost liquidity in an effort to safeguard economic growth are eroding the country’s yield premium over the US, putting “renewed pressure” on the yuan, according to Citigroup Inc.

“Going by its latest policy moves, China has likely halted or even abandoned its financial-deleveraging programme” amid the trade war with the US, Liu Li-Gang, chief China economist at Citigroup in Hong Kong, wrote in a note.

The People’s Bank of China has pumped 3.4 trillion yuan (US$492bil) into the banking system so far this year through regular open-market operations and cuts in lenders’ required reserve ratios, Citigroup estimates.

The good news for China’s economy is that growth may hold up at 6.5% for the second half of 2018 thanks to monetary stimulus, fiscal spending and initiatives by local governments that have ramped up bond issuance, Liu wrote.

The costs would be a wider fiscal deficit, greater concerns about China’s debt sustainability and an increased danger of capital flight, he said.

“Capital flight from China could increase in the future, but capital inflows would reduce” thanks to sharply narrowing interest-rate differentials, Liu wrote.

The bad news for the yuan is that authorities probably didn’t view 7 per dollar as any “psychological threshold to defend any more,” he said. “When needed, it could be allowed to weaken.”

The yuan closed on Monday at 6.9185 per US dollar in onshore trading, down almost 6% for the year and near the weakest since early 2017. — Bloomberg