China preparing contingency plans to support yuan, curb outflows: Sources

Chinese 100 yuan notes in Beijing.
Chinese 100 yuan notes in Beijing. PHOTO: AFP

BEIJING (BLOOMBERG) - China has studied possible scenarios for the yuan and capital outflows this year and is preparing contingency plans, according to people familiar with the matter.

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 on China's exports.

The authorities have used stress tests, models and field research, said the people who asked not to be identified as the studies haven't 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 didn't immediately reply to a fax seeking comment.

Policy makers in Beijing have recently taken a slew of measures 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 Eddie Cheung, a Hong Kong-based foreign-exchange strategist at Standard Chartered Plc, 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."

China may also further sell US Treasuries in 2017 if needed to keep the yuan's exchange rate stable, the people said, adding that the size of the reduction will depend on capital outflows and market intervention.

China'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 stockpile has probably shrunk further after hitting a five-year low of US$3.05 trillion (S$4.42 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, according to a Bloomberg Intelligence gauge.