Goldman sees rising risk of China's yuan repeating January rout

There is a growing risk that capital outflows from China may accelerate as the yuan weakens, says Goldman Sachs.
There is a growing risk that capital outflows from China may accelerate as the yuan weakens, says Goldman Sachs.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - There's a growing risk that capital outflows from China may accelerate as the yuan weakens, spilling over into global markets and causing a broad selloff similar to those in January and August, according to Goldman Sachs.

"We shift to an outright negative view" on the yuan, strategists led by Robin Brooks wrote in a note on Thursday (June 2).

As the People's Bank of China guide the yuan lower against the US dollar, "the risk is that this re-ignites capital flight in the same manner it did in August (during the mini-devaluation) and around the turn of the year," they said.

The yuan is trading near a five-year low as the increased likelihood of a Federal Reserve interest-rate increase in the coming months has led to a strengthening of the dollar. In January, the yuan's weakness triggered a global equity selloff amid concern that China may engineer the second devaluation since August to bolster growth. By March, the Fed lowered its forecast for its long-term borrowing costs, citing uncertainties in China.

China has shifted its management of the yuan, keeping it steady against a basket of currencies while downplaying the significance of the exchange rate versus the dollar. Such a strategy may not succeed in stemming capital outflows because it is the dollar-yuan exchange rate that Chinese households and companies are most sensitive to, the Goldman Sachs strategists said. In turn, the yuan's decline threatens to slow the pace of the Fed's tightening of monetary policy, they said.

"We see a good chance that markets will again speculate over the need for a one-off devaluation, even if the message from policy makers has been that this is not on the cards," the strategists wrote.