China's Yuan Pessimists Are Multiplying

Updated on
  • Individuals’ $50,000 conversion quota coming up for renewal
  • This is the single biggest threat to yuan now, economist says

Yuan Flight Boosts Funding Costs

China is tightening capital controls as the imminent renewal of a foreign-exchange conversion quota adds to depreciation pressure on the yuan.

Chinese citizens are allowed to convert $50,000 worth of yuan annually, and with the new year less than a month away, the potential for capital flight is building. Individuals and households are the biggest threat to the yuan now, because they can easily be influenced by short-term volatility, according to Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. The yuan has weakened 3.1 percent this quarter amid concern the Federal Reserve will raise borrowing costs, strengthening the dollar.

These four charts show that Chinese individuals and companies fancy overseas assets, and that they can push the yuan lower.

1. Safety in Dollars

Chinese households’ foreign-currency savings climbed to a record $113 billion in October, even as the yuan posted its biggest monthly decline in more than a year. Foreign-exchange reserves shrank $69.1 billion, the most since January, to $3.05 trillion in November, according to data released Wednesday. A gauge of the greenback’s strength has advanced 1 percent this year, while the yuan has weakened almost 6 percent.

2. Asset Famine

Chinese investors have been hit by a triple whammy of property price curbs, declining equities and restrictions on using borrowed money to buy bonds. Hong Kong stocks have risen 2.7 percent in the past year, compared with a 9 percent tumble in Shanghai, while real-estate prices are showing signs of cooling after a series of government measures to reduce leverage. The yield premium of China’s 10-year sovereign bonds over U.S. Treasuries has shrunk to the narrowest since 2011, making the Asian nation’s debt less attractive.

3. Exporter Pressure

Chinese exporters converted the equivalent of 58 percent of their overseas revenue into yuan in October, compared with 80 percent in early 2014. If yuan depreciation expectations persist in the near term, they will continue holding on to dollars according to Liu Dongliang, a senior analyst at China Merchants Bank Co.

4. Stretching Limits

The yuan has closed weaker than the People’s Bank of China fixing on 32 of the 42 sessions since October, suggesting that lenders and their clients are selling the currency. Chinese banks have been net sellers of foreign currency for clients for 16 consecutive months through October, according to data from the State Administration of Foreign Exchange. Policy makers should take action, including improving communication, to boost market confidence and prevent panic purchases of foreign-exchange, Caixin Magazine cited Sheng Songcheng, a PBOC official, as saying on Saturday. The onshore yuan fell 0.04 percent on Wednesday to 6.8848 a dollar.