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Frank Tang

The country’s leaders will aim to keep the yuan on an even keel and pay more attention to “financial risks” next year.
The priorities were set at the annual Central Economic Work Conference, a series of top-level closed-door meetings that ended on Friday, according to a statement released by Xinhua.
The renewed focus comes amid rising pressure on the yuan to depreciate and growing risks to the financial system in the aftermath of the US Federal Reserve’s rate rise.
China would “keep the yuan exchange rate basically stable at a reasonable and balanced level while increasing flexibility in the exchange rate mechanism”, the statement said.
China would also “put financial risk prevention and control into a more important position” to curb asset bubbles and to avoid any systemic financial risks.
Xinhua did not specify whether “basic stability” referred to the US dollar or a group of currencies.
Yuan tumbles, testing 7 per US dollar level after hawkish Fed statement
The yuan’s value against the greenback has weakened to an eight-year low, but the Chinese currency is relatively stable against a basket of currencies.
The central bank has already sought to limit swings in the domestic market. The People’s Bank of China yesterday said it had extended 394 billion yuan (HK$441 billion) in cheap loans to 19 lenders, signalling that it did want to liquidity to be too tight.
The move came a day after the Fed’s announcement sent government bond futures down to the daily limit, exposing the fragility of China’s financial markets.
Leaders attending this week’s work conference also agreed to maintain “prudent and neutral” monetary policy next year, but to take a “more proactive and efficient” fiscal policy, suggesting that Beijing could increase its
fiscal deficit.
China may widen the daily trading band and try to create a two-way movement in yuan
Tan Yaling, China Forex Investment Research Institute
The key messages from the meeting attended by President Xi Jinping and Premier Li ­Keqiang indicated that the administration would be prepared to intervene in the markets next year, analysts said.
Tan Yaling, head of the China Forex Investment Research
Institute, said the meeting highlighted the government’s determination to control the pace of depreciation. “China may widen the daily trading band and try to create a two-way movement in the yuan,” Tan said.
 Alarm bells ring for China’s leaders as US Fed fires warning shot
Bocom International managing director Hong Hao said many of the stated policy goals were conflicting and would require a delicate balancing act.
“It is hard to tell if they really want to achieve the real equilibrium in the yuan exchange rate, but such a move would be very costly,” he said.
It is hard to tell if they really want to achieve the real equilibrium in the yuan exchange rate, but such a move would be very costly
Hong Hao, BOCOM International
China must sell US dollars if it wants to stop the yuan from falling too far but that would rapidly deplete its foreign exchange reserves. Beijing has already burned through a large chunk of its US treasuries – so much so that it is no longer the biggest holder of US government debt.
China Construction Bank forex analyst Han Huishi said the policy statement partly reflected Beijing’s fears about capital outflows and financial risks.
China has stepped up capital controls in the month since Donald Trump’s win in the US presidential election, making it more difficult for outbound payments and investment.
The priorities from the work conference dovetail with the Politburo’s announcement last week that the country should seek progress while maintaining stability for 2017. The Politburo said the focus was needed, given the persistent complex domestic problems, including high debt levels, overcapacity and growing uncertainties offshore.
The central bank has tried to squeeze the bubble in the interbank bond market in recent months and we have been instructed to step up risk scrutiny
Bank of Dongguan analyst Chen Long
Bank of Dongguan analyst Chen Long said capital outflow risks needed to be kept in check until early next year.
“The central bank has tried to squeeze the bubble in the interbank bond market in recent months and we have been instructed to step up risk scrutiny,” Chen said.
The top focus on stability has been reflected in joint action by securities and insurance regulators against “barbarians” in the capital market but there is still no overhaul of the regime in sight.
Leaders have also pledged to “curb property bubbles” and to “avoid big swings in the housing market” but “there is no sign that China will raise interest rates, the best tool I think, to contain it,”
Bocom’s Hong said.
“Property purchase restrictions will largely stay in place.”
Additional reporting by Wendy Wu


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The yuan has remained relatively stable against a basket of currencies. Photo: Reuters

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China's leaders have been trying to tame debt and stem the risk of capital outflows. Illustration: Adolfo Arranz

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A man walks past a billboard with the U.S. currency displayed on its outside a bank in Beijing, China, Thursday, Nov. 24, 2016. China's state media reported China's yuan further weakened on Thursday and for the first time since 2008 fall beyond 6.9 against the U.S. dollar. (AP Photo/Ng Han Guan)

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