Is China’s Deleveraging Campaign Driving Up the Yuan?

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The central government’s ongoing deleveraging campaign as well as renewed efforts to stymie capital outflows could push the Chinese yuan higher in the second half of 2017.

The Chinese yuan has performed well against the greenback of late, with market observers expecting it to break through the 6.70 threshold after hovering around the 6.72 level during the past two trading sessions.

Analysts such as ANZ’s chief China economist Yang Yuting have made the point that the present strength of theĀ yuan is the result of a shaky US dollar, as opposed to endogenous factors within the Chinese market.

The US Dollar Index, a measure of the value of the greenback against a basket of foreign currencies, consistently weakened of late, falling 9% since the start of 2017 to push hard against the 93 threshold.

The performance of the Renminbi could improve even further in the second half of 2017 on the back of domestic economic factors that will bring it significant tail winds.

Chief amongst them is China’s ongoing deleveraging campaign, which the central government has signalled must continue unabated.

As led by the People’s Bank of China, the deleveraging campaign will constrain the availability of funds on the market, pushing market interest rates higher, which will serve to ease capital outflows and strengthen the yuan.

Regulators are also seeking to curb outflows of funds, having implemented a general capital account policy of “expanding inflows, controlling outflows” since the second half of last year.

Beijing has recently signalled that the strictness of controls on capital flight is set to increase, with renewed efforts to thwart overseas acquisitions by marquee Chinese companies, as well as heightened scrutiny of exchange purchases and cross-border transactions.

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