Beijing weighs more options to back yuan
Authorities in China have studied a number of possible scenarios for the yuan and capital outflows this year and are preparing contingency plans, according to people familiar with the matter.
They have used stress tests, models and field research, said the sources, who asked not to be identified as the studies have not been made public yet. Financial regulators have already encouraged some state-owned enterprises to sell foreign currency and may order them to temporarily convert some holdings into yuan under the current account if necessary, they added.
The State Administration of Foreign Exchange did not immediately reply to a request for comment.
The reported plans come amid increasing pressure on the yuan from a resurgent US dollar, rising capital outflows and concern that US President-elect Donald Trump may make good on his threats to take punitive measures against Chinese exports.
Policymakers in Beijing have recently taken several measures to tighten control of the currency market, including placing greater scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.
“China has been challenged by capital outflows and declining foreign-exchange reserves, and policymakers are taking measures to solve the problem,” said Eddie Cheung, a Hong Kong-based foreign-exchange strategist at Standard Chartered, the most accurate forecaster for Asian emerging-market currencies according to a Bloomberg ranking.
“Funds will continue to exit in the first half due to individuals’ purchases of the dollar and on concerns about US political uncertainty.”
China may also further sell US Treasuries in 2017 if needed to keep the yuan exchange rate stable, the sources said, adding that the size of the reduction would depend on capital outflows and market intervention. The country’s holdings of Treasuries declined to the lowest in more than six years in October as the world’s second-largest economy used its currency reserves to support the yuan.
China’s currency stocks are believed to have shrunk further since hitting a five-year low of US$3.05 trillion in November, according to the median estimate in a Bloomberg survey.
Capital outflows from China accelerated in recent months as the yuan suffered its worst year of losses against the US dollar since 1994, declining 6.5%. About $760 billion left the country in the first 11 months of 2016, according to a Bloomberg Intelligence gauge.
“The policies, if implemented, can help increase foreign-exchange supply in the onshore market, and hence help defend the yuan in the short term,” said Carol Pang, vice-president for fixed income, currency and commodities at Zhongtai International Holdings in Hong Kong. “However, it won’t change market expectations of further depreciation.”