Beijing may loosen capital controls as yuan hits 14-month high

PUBLISHED : Wednesday, 30 August, 2017, 6:38pm
UPDATED : Wednesday, 30 August, 2017, 6:38pm

Both onshore and offshore yuan rose to the highest level in 14 months, which analysts said may herald a loosening of capital controls in the coming months.

Onshore yuan rose 0.19 per cent to 6.5838 against the US dollar on Wednesday, marking the highest level since June 24, 2016. Offshore yuan advanced 0.27 per cent to 6.5906 per dollar, the 11th straight day of gains. The currency has gained 2.65 per cent so far this month, the best performance among the 11 most traded Asian currencies.

Early on Wednesday, the People’s Bank of China raised the daily yuan reference rate by 0.29 per cent to 6.6102 per dollar, its strongest since August 17.

This year’s strength comes amid a slide in the dollar as confidence in the Trump administration to implement its economic agenda fades. The dollar index rebounded on Wednesday after plummeting to a two-year low the previous day, as fears over North Korea eased.

We expect the government to gradually loosen capital controls in the coming months
Macquarie Bank, research note

The Chinese central bank’s decision to add a counter-cyclical factor to its daily fixing formula and to engineer a spike in the yuan to quash bearish speculators, have also helped the currency to recover from last year’s strong depreciation.

China’s ratio of the trade surplus from goods that was converted into yuan between January and July increased to 60 per cent from last year’s 35 per cent, indicating that depreciation expectations in the yuan were fading, Macquarie Bank said in a recent research note.

“As such, we expect the government to gradually loosen capital controls in the coming months,” Macquarie said, adding that the yuan would climb to 6.4 per dollar in the short term.

The mainland’s foreign exchange reserves rose by US$24 billion to a nine-month high of US$3.08 trillion in August, although the government has generally maintained tight capital controls this year.

However, a flurry of official comments in recent months have pointed to further flexibility in the yuan, with rumours circulating that China may expand the currency’s daily trading band against the greenback to 3 per cent from the current 2 per cent.

Scotiabank said it expected the yuan to strengthen ahead of major events in the rest of this year, including the ruling party’s 19th national congress, the US Treasury Department’s semi-annual foreign exchange policy report and President Trump’s visit to China.

Forex broker FXTM also expects the yuan to appreciate, eventually reaching 6.55 given the clear “buy” signal triggered on technical charts when the offshore yuan broke through the psychological 6.70 resistance level.