China 'studies options to support yuan'

Mr Trump on the cover of a Chinese magazine advertised in Shanghai. Concern that the US President-elect will make good on his threats to take punitive measures on China's exports has added to rising pressure on the yuan.
Mr Trump on the cover of a Chinese magazine advertised in Shanghai. Concern that the US President-elect will make good on his threats to take punitive measures on China's exports has added to rising pressure on the yuan.PHOTO: AGENCE FRANCE-PRESSE

Plans come amid rising pressure on currency from resurgent US$

BEIJING • China has studied possible scenarios for the yuan and capital outflows this year and is preparing contingency plans, said people familiar with the matter yesterday.

The authorities have used stress tests, models and field research, according to the people who asked not to be identified.

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 fax seeking comment.

The reported plans come amid increasing pressure on the yuan from a resurgent dollar, rising capital outflows and concern that US President-elect Donald Trump may make good on his threats to take punitive measures on China's exports.

Policymakers in Beijing have recently acted to tighten control of the currency market, including placing higher 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 policy makers are taking measures to solve the problem," said Hong Kong-based forex strategist Eddie Cheung 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 of US political uncertainty."

Beijing may also further sell US Treasuries this year to stabilise the yuan's exchange rate, the people said, adding that the size of the reduction will depend on capital outflows and market intervention.

China's holdings of Treasuries fell to the lowest in more than six years last October as the world's second- largest economy used its currency reserves to support the yuan. The country's currency stockpile has likely shrunk further after hitting a five-year low of US$3.05 trillion (S$4.4 trillion) in November, according to the median estimate in a Bloomberg survey before data due as early as this week.

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 per cent. About US$760 billion left the country in the first 11 months of 2016, a Bloomberg Intelligence gauge shows. The yuan will fall 2.5 per cent the rest of this year, according to the median estimate in a Bloomberg survey.

"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 Ms Carol Pang, vice-president for fixed income, currency and commodities at Zhongtai International in Hong Kong. "However, it won't change market expectation of further depreciation."

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A version of this article appeared in the print edition of The Straits Times on January 05, 2017, with the headline 'China 'studies options to support yuan''. Print Edition | Subscribe