Should China Let Yuan to USD Keep Dropping Amid Increasing Capital Flight?
Capital outflows from China are accelerating. That can only mean one thing: the Chinese central bank—The People’s Bank of China (PBOC)—will continue to liquidate its holdings of foreign currencies, including the dollar, to support it. The yuan is on its way to its biggest drop in nearly 20 years.
It is likely we will reach the point of seven yuan for one dollar very soon. The yuan to USD is already at just over 0.143 yuan. Conversely, it costs 6.95 yuan for every dollar. The PBOC has liquidated its foreign currency reserves to the tune of some $1.0 trillion since the summer of 2014. (Source: “To let the yuan fall or not? Beijing’s big burning currency question,” Business In Vancouver, December 19, 2016.)
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But, at the same time, the yuan continues to depreciate. Even in the face of the second world economy, China, the dollar is irresistible. This suggests that the dollar is likely to continue to appreciate anywhere in the world, especially against the euro.
Chinese exporters may like a cheap yuan to favor exports. But in just about a month from now, President Donald Trump will take over the Oval Office. He has already sounded the alarm about the yuan being too low.
This raises the question as to how Chinese authorities must react. Allowing the current course would continue to fuel capital flight. It would also run counter to the next U.S. administration.
If Beijing and the PBOC allow market forces to prevail, the yuan to USD exchange will move above seven (dollars). But, to prop up its currency, the PBOC would have to keep burning foreign reserves. (Source: Ibid.)
The U.S. Federal Reserve’s higher interest rates and the promise of more hikes over the next 12 months puts more pressure on the PBOC. As much as Beijing may like a controlled, or gradual, depreciation of the yuan, the “Trump era” market and dollar will make this an almost impossible course. (Source: Ibid.)
