China's Yuan Face Much Tougher Road in Rest of 2017

Looking at the performance of China’s currency this year, one would suspect that things are looking up in the local economy. The reality is that the yuan’s 4.5 percent gain against the dollar is as much a reflection of weakness in the U.S. currency as it is about developments in China. At this point, what investors should expect for the rest of the year is a roughly stable yuan, or one that strengthens at a much slower pace.

To understand how the yuan got to this point, consider that Chinese foreign-exchange reserves have been expanding for the past six months, reaching a nine-month high of $3.01 trillion. Behind that increase sits better trade balance surpluses, which increased for five straight months as a result of stronger growth among China’s main trading partners as well as some deceleration in Chinese imports since the end of last year. Second, Chinese controls on capital outflows appear to be effective. Overseas mergers and acquisitions by Chinese companies fell 43 percent in the first half of 2017 from the same period of 2016. Chinese overseas property investment declined 82 percent.