HONG KONG • The biggest slide in China's yuan since 2015 threatens to revive concerns about the capital flight back then that helped spur the country to spend US$1 trillion (S$1.38 trillion) of its reserves.
For all its perceived success in tightening regulations and strengthening scrutiny of funds moving abroad, the trauma of that period poses a big reason to avoid any continuous depreciation.
An even more important financial consideration could be the stockpile of Chinese dollar debt, which has more than doubled since the end of 2015 to US$729.8 billion, according to data compiled by Bloomberg. Issuance so far this year is a record US$138 billion.
"Capital flight is still a major concern," said Mr Fraser Howie, who has two decades of experience in China's financial markets and co-wrote the 2010 book Red Capitalism. "They are not going to be doing anything foolish."
Indeed, even as the People's Bank of China (PBOC) on Monday blamed the yuan's tumble on the market reacting to the US plan for fresh tariffs on Chinese imports, the central bank said it would fight against short-term speculation and stabilise market expectations. And the yuan could still return to trade stronger than seven per US dollar, it said.
That suggests limited appetite for the kinds of market-driven overshoots that regularly occur in other exchange rates. China is "playing with the margins" unless it lets the yuan sink to 7.5 per dollar, Mr Howie said. It closed at 7.0430 in Shanghai on Monday, reaching its weakest since 2008.
The slide in the currency was met with accusations of manipulation from US President Donald Trump.
PBOC governor Yi Gang said China will not use the yuan as a tool to deal with trade disputes. "I am fully confident that the yuan will remain a strong currency in spite of recent fluctuations amid external uncertainties," he said in a statement published on Monday evening in Beijing, adding that the bank will work to ensure "reasonable and legal demand" by companies and the public for foreign exchange.
Unlike Russia, which has aggressively sought to reduce its economy's ties to the dollar, China remains strongly entwined with the US currency. Any unrestrained yuan depreciation could make it tougher for Chinese companies to refinance, as well as incentivise firms and individuals to move money outside the country.
"We still expect the People's Bank of China to tightly manage exchange rate expectations and prevent the yuan from depreciating significantly," Dr Wang Tao, chief China economist at UBS Group in Hong Kong, wrote in a note on Monday. "We do not think a significant depreciation would offset fully the trade war impact and, more importantly, the authorities also worry a large depreciation could be destabilising."
China is already contending with a record series of defaults in its onshore bond market, the world's second biggest.
A sinking yuan exchange rate could then force officials to organise financing for some offshore borrowers "and fold a few", given industrial overcapacity, in the view of Dr Sebastien Galy, senior macro strategist at Nordea Investment Funds .
Back in 2015 and years prior, the Chinese found a variety of ways to squirrel money out of the country. Fake invoicing for overseas trade or services was one favoured option. Regulators clamped down by stepping up scrutiny and taking measures such as curbing purchases of overseas insurance products and stopping friends and family members from pooling their US$50,000 a year quotas to get large sums of money out.
Dr Liu Li-Gang, chief China economist at Citigroup in Hong Kong, is among those signalling confidence in the tighter regulatory oversight.
"The risk of a repeat of large capital outflow associated with the 2015 to 2016 depreciation episode could be contained," Dr Liu wrote in a note on Monday. Even so, there will be leakage as "the uncontrollable errors and omissions type of capital flight will continue", he wrote.