Goldman Sees 'Limited' Room for Further China Yuan Depreciation

  • Falling oil prices will boost China's current account surplus
  • Capital outlfows rise to about $367 billion in three months

China’s yuan, which weakened the most since 1994 last year, has “limited” room for further depreciation as slumping oil prices will help boost the government’s current account surplus and offset capital outflows, according to Goldman Sachs Group Inc.

The country is the world’s second-largest importer of oil. Low crude prices may prop up its surplus to about $360 billion this year, a level last seen before the global financial crisis, Goldman analysts led by Robin Brooks wrote in a report on Tuesday. The increase will provide additional “space” in China’s balance of payments to absorb capital outflows, they wrote. A relatively strong export market compared to other developing nations also suggests the exchange rate is fairly valued, according to the report.

“The room for gloom on the yuan is quite limited,” the analysts wrote. “The yuan is essentially at fair value.”

The report came after the yuan dropped to a five-year low on Monday, stoking concern that the country’s slowest economic growth in 25 years will accelerate capital outflows. The central bank intervened Tuesday to prevent excessive volatility, according to a person with direct knowledge of the matter who asked not to be identified because they weren’t authorized to speak publicly. China in December introduced an index that values the yuan against a broad range of currencies to de-emphasize its link to the greenback.

Oil Slump

Capital outflows from China swelled to an estimated $367 billion in the three months ended in November, according to data compiled by Bloomberg. The yuan has weakened almost 5 percent since Aug. 11, when officials announced a sudden devaluation and said it would allow the market a greater say in setting its value.

Lower oil prices help reduce import costs for fuel in China, the world’s biggest commodity consumer. A $10 drop in average oil prices would reduce the costs by $25 billion a year, according to Goldman Sachs’ estimate.

The yuan strengthened 0.3 percent to 6.5159 on Tuesday. Brent crude fell 2.1 percent to $36.42 a barrel.

Before it's here, it's on the Bloomberg Terminal.