Yuan Global Push Seen Losing Momentum as Li Silent on Reforms

  • Premier Li doesn't mention internationalization in work report
  • Currency stability is likely China's top priority, Mizuho says

The lack of new foreign-exchange policies in Premier Li Keqiang’s annual report to legislators is prompting economists to speculate that China will probably slow efforts to increase the yuan’s global usage and focus more on keeping the currency steady.

Li shied away from saying the nation will increase the yuan’s two-way flexibility and make progress toward its convertibility under the capital account, departing from language used in the work report at last year’s National People’s Congress. He said instead that the currency will remain generally stable at an appropriate and balanced level, and that improvements will be made to how the exchange rate is decided.

The change in wording “suggests that Chinese authorities are setting yuan stability as the top priority,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “Any mismanagement on foreign exchange or the economy will ruin market confidence, trigger heavy capital outflows and throw the nation into crisis mode.”

The People’s Bank of China made a two-pronged attack on yuan speculators earlier this year, choking outflows from the mainland while mopping up the currency offshore. The International Monetary Fund said it will start identifying the currency in its official foreign-exchange reserves database from October. China aims to move ahead with both convertibility and internationalization of the yuan, according to a five-year plan released on Saturday.

The nation’s defense of the yuan depleted its foreign-exchange reserves by $513 billion last year, the first annual drop since 1992. Bloomberg Intelligence estimates that a record $1 trillion fled overseas in 2015.

“They moved too fast on capital account opening,” said Alex Wolf, an economist for emerging markets at Standard Life Investments Ltd. in Edinburgh. “There is the potential they progressed rapidly to meet the special drawing rights requirements before the once-every-five-year reviews and now will drastically slow the process.”

— With assistance by Tian Chen, and Lillian Chen

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