US Attracting Chinese Capital Outflow
Last Thursday, China took another step to degrade the USD in defining the value of its currency, in an effort that cuts against its rival’s strong hold on the global financial system.
An arm of the People’s Bank of China (PBOC), which last year started setting the RMB Yuan Vs a basket of currencies, on Thursday said it’s adding 11 units to that reference group.
The move lowers the Buck’s weighting by 4%, to 22.4%, more than 2X the share for South Korea’s Won, a new entrant.
While the logic of determining the RMB Yuan’s value Vs the currencies of its trading partners is clear, the problem is that USD is still the dominant reference in the perception of the public and the market. The US currency is on 1 side of 88% of all Forex (foreign-exchange) trading.
RMB Yuan’s retreat against the CFETS RMB Index, the basket set by the China Foreign Exchange Trade System, has been more moderate this year than against the USD, as the currencies of China’s trading partners have also declined.
That offers an image of stability that would appeal to the nation’s leadership that is striving to maintain economic growth in excess of 6.5% and reduce leverage, all while heading off any exodus of domestic capital.
The challenge is that China’s swelling middle class, along with its ultra-wealthy, are looking to diversify some of their increasing pool of savings overseas.
Prospects for higher US interest rates only increase the allure of the USD.
Simply adding currencies including Korea’s Won, South Africa’s Rand, the Dirham of the United Arab Emirates, Saudi Arabia’s Riyal, and Turkey’s Lira will not be enough to change the public’s view, according to a number institutional analysts.
The background to last week’s announcement
An accelerating outflow of funds that has seen China’s foreign-exchange reserves slide; the PBOC’s RMB Yuan positions dropped last month by the most since January.
The PBOC said Friday it tightened requirements for lenders to report cross-border transactions by customers as part of efforts to curb money laundering.
China will require financial institutions to report any cross-border transfers of 200,000 RMB Yuan ($28,800) or more starting on 1 July 2017.
Expect RMB Yuan to continue to depreciate against USD and the pressure of capital outflow will likely persist in Y 2017,” Analysts estimate a rate rate would be 7.5 per dollar, Vs 6.96 Tuesday.
If the USD extends its rally this year, particularly Vs the EMs (emerging-market) currencies under Donald Trump’s Presidency, the onshore and offshore RMB Yuan will come under heavier pressure.
Also kicking in: the renewal of citizens’ $50-K quota of foreign-currency purchases. The likelihood of further Fed rate hikes, and concern that US President-elect Donald Trump will place punitive tariffs on China’s exports to the world’s largest economy, are adding to the challenges facing policy makers.
Beijing holds a wide array of capital controls and a strong hold on the Chinese financial system, with state-owned banks dominant policy makers could offer window guidance to banks to reduce residents’ USD buying if there’s panic this year.