“The pressure for the yuan to decline could be stronger next year as Trump’s policies could lead to a dollar rally and amid concerns about China-U.S. trade relations," said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc in Singapore. "The People’s Bank of China can curb high volatility with stronger fixings and intervention, but it won’t do so unless outflows surge, as such measures could add great pressures to the foreign reserves."
A record $44.7 billion left China in September in yuan payments, while the nation’s foreign-exchange stockpile shrank the most since January last month. Chinese officials have taken a series of steps to plug capital control loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country. UnionPay Co. late last month limited mainlanders from using its cards to buy insurance in Hong Kong.
HSBC Holdings Plc, UBS Group AG and Australia & New Zealand Banking Group Ltd. lowered their yuan forecasts on Tuesday, predicting that the currency will end this year at 6.9 per dollar, compared with earlier estimates of 6.8 for the first two lenders and 6.75 for the third. BMI Research, a unit of Fitch Group, downgraded its year-end forecast to 6.85 from 6.8, while Norddeutsche Landesbank said it has revised its view to 7 from 6.8.
The Dollar has been trending higher against the Renminbi since early 2014 but the pace of the advance has picked up following the US election. The rate paused at CNY6.4, 6.6, 6.7 but has surged through 6.8 this week. The Renminbi’s depreciation is part of Chinese government policy since it is needs a weaker currency to soften the blow from the rationalisation of heavy industry particularly in the steel, cement and coal sectors. However it will want to avoid an unruly decline and therefore the quicker the Dollar rises the greater the risk of some form of intervention.
The banking sector is an arm of the government and plays host to Chinese consumer’s substantial cash reserves equivalent of trillion of Dollars. It is that capital base which blunts the impact of the much publicised bad loans problem. It is also why the government is very sensitive to any threat of capital flight. There are loopholes which are widely availed of by wealthy Chinese to get their money out of the country. These include Hong Kong insurance policies, double invoicing, bitcoin, having children study overseas and a host of additional ploys. It is inevitable that the government will attempt to close more of these avenues down in order to restrict capital flight as it manages the currency lower. How successful it is in achieving that goal is important because failure would increase the potential for a large one-off devaluation similar to 1994.
The FTSE/Xinhua A600 Banks Index has been relatively inert since January but exhibits a mild upward bias.
Meanwhile the Shenzhen B Shares Index, which importantly does not include banks bounced from the region of the trend mean last week and a sustained move below it would be required to question medium-term scope for continued higher to lateral ranging.
The Hong Kong listed China Enterprises Index (H-Shares) is currently trading in the region of the trend mean and a sustained move below 8000 would be required to question medium-term recovery potential.