Yuan stability is more important than liberalisation
While freeing up the currency must remain a long-term goal, the current global uncertainty makes keeping it stable a more pressing imperative
China has found gaining credibility and stability for the yuan may be two conflicting goals. It has liberalised the yuan just enough in recent years for it to gain international status as a reserve currency. But since being admitted into the currency basket of the special drawing rights under the International Monetary Fund in October, the yuan has fallen to new lows. That has so alarmed the central bank that it is now desperate to shore up capital controls to slow down outflows of the currency. This is a risky operation, a short-term programme aimed at stabilising the currency at a time of global economic and political uncertainties.
The People’s Bank of China has imposed stringent limits on the amount of yuan that Chinese companies may send out of the country. The new cap – limited to lending the equivalent of 30 per cent of a company’s equity to an overseas entity in yuan – is the first such imposition in more than two decades, and comes amid an around 7 per cent decline in the currency’s value this year. After trying to prop up the yuan in the currency markets, Beijing wants more firepower to curb capital outflows. This includes mandating a slowing of a recent buying spree of foreign assets by mainland firms and requiring prior approval for cross-border payments exceeding US$5 million for overseas investment.
These aim to drain offshore yuan liquidity because too many companies and speculators have been exporting yuan for currency swaps or for shorting it as a way of bypassing domestic restrictions. For now, China’s central bankers are willing to put their international ambitions for the yuan on hold for the sake of preserving its stability. This is understandable, given all the uncertainties the global economy faces. There are signs of a slow revival for the mainland economy. That helps to strengthen Beijing’s argument that there is no reason for a sustained yuan depreciation given the economy’s fundamentals.
But with Brexit and the Italian referendum, the near-term outlooks for the euro and the EU are highly unpredictable. Then, there are the doldrums in which Abenomics has been mired in Japan and the shock electoral victory of Donald Trump in the US. All these spell profound uncertainties for three of the world’s largest economic blocs outside China. The yuan’s liberalisation must remain China’s ultimate goal. But in this brave new world of highly unpredictable outcomes, the value of the yuan is one thing Beijing still has relative powers over. Maintaining a stable level for the yuan is – for now – the more desirable option.