Signs emerge of newfound yuan stability

A little less than a year after buying a small apartment in Hong Kong, Liu Fangfei is breathing easier, but not because home prices have moved higher in the special administrative region or that she has made any kind of fortune flipping real estate.

No, Liu is breathing easier because the funds used for her purchase were yuan-denominated savings that she and her parents had held.

“If I had waited, we would have lost a lot,” she said. “We saved a lot of money by buying the apartment.”

The Chinese currency has depreciated around 4.5 percent since January when one US dollar could buy 6.5 yuan. As of Nov 9, the same dollar was fetching almost 6.8 yuan.

Liu and hundreds of thousands like her who parked their yuan savings in Hong Kong real estate, and the tens of millions on the Chinese mainland who have taken to buying up US dollar assets anticipating an ongoing devaluation, have done well thanks to the yuan’s fall in value.

Yuan-denominated deposits in Hong Kong rose 1.9 percent in September to the equivalent of $98.28 billion, according to latest figures from the Hong Kong Monetary Authority. Yuan deposits account for 6.6 percent of all deposits in Hong Kong. The September increase was something of a surprise after a long string of steady declines.

In December 2014, there was slightly more than 1 trillion yuan deposited in Hong Kong bank accounts. Christopher Balding, an associate professor of economics at Peking University HSBC Business School in Shenzhen in South China’s Guangdong province, believes that was when yuan deposits peaked. By August 2016, the figure had dropped to 653 billion yuan.

“It is very difficult for RMB assets to grow very much if the RMB price follows the offshore RMB lower,” Balding told China Daily.

“The offshore RMB is almost always trading at a not insignificant discount against the onshore RMB.”

The value of the yuan against the US dollar has been declining since early 2014. In January of that year, one dollar was buying just over 6 yuan. Over the last couple of years, the Chinese currency has dropped as much as 12.5 percent.

One tell-tale sign is the price of digital currency Bitcoin, which roughly tracks the price of the yuan against the dollar. As the value of the yuan drops, demand for Bitcoin increases.

Bitcoin is often used as a way to move currency out of China. And the price for the cryptocurrency topped $600 in October, doubling from early 2015.

This drop in the value of the yuan has generated some concerns among investors that Chinese companies with dollar loans might get into trouble as those payments become more expensive. But there has been little fallout to date and the downward trend could start to reverse over the next year or so.

Earlier this year, Citi, the USheadquartered financial services firm, anticipated that the yuan would hit 6.8 to the dollar within 12 months. It is already there, but the risk of a large and surprising devaluation is much smaller than it once was.

Not only that, but the longterm trend in the value of the yuan against other currencies could start to turn as China’s economic growth stabilizes, perhaps around the 6.5 percent rate.

One sign of the yuan’s newfound stability is Citi’s plan to include Chinese government bonds in its World Government Bond Index, perhaps sometime next year. The bank would give Chinese bonds a weight of around 4.6 percent in the index.

Bond funds that track the index would then buy into Chinese government bonds, and that should translate into a capital injection of $100-150 billion. While not a huge injection, this is another sign that the yuan, and yuan-denominated products, are now a permanent fixture of global financial markets.

Even as the yuan has dropped in value, China has undertaken a big push to expand the currency’s use around the world. A series of measures has made it much easier to settle trade payments using yuan, but the aims of importers and exporters are different.

“Chinese importers are willing to pay in RMB but Chinese exporters want to be paid in US dollars,” Balding of the HSBC Business School explained. “They have made it easier to invest from abroad into Chinese financial assets.”

Without doubt, the yuan is in much wider use today than it was just a few years ago.