Making yuan a global currency can wait. For now Beijing has prioritised stabilising the yuan over everything else, tightening controls over capital outflow to curb speculation that triggered sharp devaluation of the currency this month. But it has not closed the door to the global dream and investors just need to adapt to its new pace.
As capital outflow pressure piles up with the decoupling of monetary policies between China and the US, and expectation for a weaker yuan grows as economic growth slows to the lowest pace in 25 years, China is struggling to rebalance its pace of opening up its capital account, an irreversible commitment it has signed on to by joining the International Monetary Fund’s elite list of currencies in November.
“China is obviously not moving to a new regime in which suddenly everything becomes market-based. It’s not surprising that the government is managing the process. Managing the process means opening the door for a little while, and closing it, and opening again,” said Markus Schomer, chief economist at PineBridge Investments.
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According to KH Heng, senior forex strategist at Credit Suisse Private Banking, “It looks like the immediate priority of the Chinese authorities is to stem excessive capital outflow and one-sided speculative bets for yuan depreciation.”
“But I believe that over the long term, over a multi-year horizon, the objective is still internationalisation of the RMB. This is in line with recent efforts for more foreign central banks to trade in onshore foreign exchange market,” he said.
Doubts have been cast on China’s grand plan opening up its capital account after the People’s Bank of China (PBOC) unexpectedly pushed up the funding rates on the offshore yuan markets on January 12 and imposed the reserve ratio on foreign banks a week later.
Before that, the turmoil on China’s yuan market had battered offshore yuan – mainly traded on the free market in Hong Kong – to a five-year low as it plunged to 6.6964 against the US dollar on January 6.
PBOC data show commercial banks sold a net 629 billion yuan (US$95.61 billion) worth of foreign exchange in December, or nearly triple the amount the previous month, as capital outflows grew.