As Beijing Battles to Keep Yuan at Home, Chinese Prepare to Sell

09-Dec-2016 Intellasia | WSJ | 6:00 AM Print This Post

Foreign-exchange quotas for the public will be reset on January 1, with an outgoing surge of cash expected

Shen Jia’s New Year’s resolution is to convert as much yuan into US dollars as she can when 2017 arrives.

Like all Chinese, the 36-year-old homemaker is allowed to exchange up to $50,000 worth of yuan a year, and she used up her 2016 quota months ago as the yuan has weakened. So did everyone in her extended family.

As Beijing struggles to slow the outflow of cash and an erosion in its stockpile of foreign currency, the clock is about to restart on individuals’ annual foreign-exchange quotas, which is expected to set off a fresh gush of outflows. The foreign-exchange pile fell by almost $100 billion in January this year, after the quota reset.

The pressure to get out of the yuan hasn’t abated. Data from the People’s Bank of China on Wednesday showed that China’s currency holdings shrank by $69 billion in November to $3.052 trillion, the fifth straight month of declines and the worst month since January. The reserves are now at the lowest level since March 2011.

“Everybody is predicting more depreciation to come, so I’d better hurry,” said Shen, who plans to use the dollars for overseas trips.

The prospect of greater outflows confronts the government with the question of whether to revise the quota. Officials and others in government circles privately brush off that possibility, though they acknowledge the concern.

“If people believe renminbi is a one-way bet on the downside, of course they would want to exchange more,” a government adviser said, using another name for the yuan.

Harrison Hu, China economist at Royal Bank of Scotland, predicted that a tightening of the reins on households’ foreign-currency purchases is likely in the coming months. “Banks, under ‘window guidance,’ may apply implicit quantity controls,” Hu said, referring to possible instructions from regulators.

The cap was increased in 2007 from $20,000 a person each year as part of broader financial liberalisation. Lowering it now would send a dire message about the economy and increase the risk of panic selling of the yuan, according to officials and economists. Keeping it as is, however, likely means a big rush of money exiting, putting more downward pressure on the yuan’s value and forcing the central bank to dig further into China’s currency reserves.

So far, China’s foreign-exchange regulator has tried other ways to keep money at home, dismissing speculation that the conversion quota will be reduced. Most recently, the State Council, China’s cabinet, put in place new rules aimed at slowing overseas investments by Chinese companies. In addition, regulators have instructed banks to limit sharply how much companies, both foreign and Chinese, move out of the country and into their other operations around the world.

Officials have also resorted to moral suasion to prevent money from leaving. An article in the official People’s Daily newspaper late last month urged individuals not to “blindly follow the crowd” to convert yuan into foreign currencies.

When Chinese convert yuan to US currency, the PBOC ultimately is the buyer of the yuan for dollars, so that leads to a drop in foreign-currency reserves. And when the Chinese spend those dollars overseas, that is considered an outflow.

The specter of capital flight started to emerge late last year, following the central bank’s surprise devaluation of the yuan in August 2015. To stem the bleeding, the PBOC resorted to heavy market intervention to prop up the currency. A new exchange regime established early this year was also intended to instill stability into the yuan’s exchange rate.

Since early October – immediately after the International Monetary Fund formally included the yuan among its reserve currencies, long a goal for Beijing – the government has shown greater tolerance for a cheaper yuan. That helps boost lackluster exports in a time of economic challenge. After the dollar’s recent surge following Donald Trump’s US presidential election win, the yuan is down about 6 percent against the dollar this year.

The weakening trend makes it urgent for Chinese with yuan incomes but dollar obligations to use their quota fast. That includes the many parents of Chinese studying in the US Families often pool quotas, say, to allow one member to buy property overseas, according to analysts and bankers.

Businesses are also trying to hold more foreign currency. Du Yaliang, owner of a toy maker in Shenzhen that sells to the North American market, is putting off exchanging his dollar profits for yuan for as long as possible. Like many other exporters, he has also entered into derivative contracts that enable him to make money if the yuan declines further.

The Institute of International Finance, a Washington-based group of global financial institutions, estimates net capital outflows of $530 billion from China in the first 10 months of the year. But some analysts say the amount could be even greater as more Chinese companies and individuals send or carry yuan funds offshore directly without converting them into dollars first.

Sheng Songcheng, an adviser to the PBOC, suggested that the central bank use part of its foreign-currency reserves to maintain market confidence in the yuan, according to a transcript of his remarks at a forum in Beijing over the weekend.


Category: China

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