How Low Will the Yuan Fall?

In China as elsewhere talk is cheap but in the land of managed Capitalism the Yuan is cheaper. China has a problem. Its decades-long economic miracle is petering out. Exports are falling, debt is rising and rich Chinese with the where-with-all are moving money out of the country. As part of the attempt to prop up the Yuan as the currency falls to a six-year low Chinese officials are talking up the currency. Bloomberg reports the story.

Chinese officials and state-run media stepped up efforts to curb yuan depreciation concerns, talking up the currency as it traded near the weakest level in six years.

The exchange rate isn’t likely to drop much more because a rally in the dollar is close to an end, according to a report Thursday in the Financial News, a central bank publication. The article follows comments from People’s Bank of China Deputy Governor Yi Gang that the nation will keep the exchange rate stable and that there’s no basis for persistent declines. Ma Jun, chief economist at the PBOC’s research bureau, added his voice to the defense, saying that the yuan’s depreciation in October has been driven mainly by the greenback’s advance.

The problem for those who are trying to talk the Yuan out of its currency dilemma is that this rhetoric is getting stale upon repetition and fails to address the issue of China’s need to revamp its economy and move to a consumer driven base and move away from the state managed economy model. Until that happens wealthy Chinese will continue to move money offshore and use underground banking if necessary to accomplish their aim of moving assets out of the Yuan.

Perhaps the most accurate indicator of how well or poorly things are going is China is the increased level of capital outflow. The government has taken steps to make it harder to move money out of China so some wealthy Chinese have gone underground. Bloomberg reports on the crackdown on illegal capital outflows in China and a $148 billion bust of underground banking.

The Yuan is falling because China’s economy is weakening and because those with lots of money are finding ways to stay ahead of the curve and convert their Yuan to dollars, euros or yen before the Yuan falls even further.

Talking about the Chinese Economy

Lack of transparency has always been an issue when dealing with China. Not only are officials talking up the Yuan they are providing economic numbers meant to reassure folks that the economy is doing just fine, thank you. ABC News reports on the uncanny stability of reported Chinese growth at 6.7% year on year.

Over the quarter GDP growth rose 1.8 per cent, the same rate as the second quarter and up from 1.2 per cent in the first quarter.

The GDP number pretty well ensures that 2016 GDP growth will come in at around 6.7 per cent, right in the middle of a target band of 6.5 to 7 per cent committed to at the National Peoples’ Congress earlier this year.

Capital Economics analyst Julian Evans-Pritchard said the official GDP figures remain too stable to say much about the performance of China’s economy.

“For our part, we do think that China’s economy is expanding slower than the official figures suggest,” he noted.

“Our China Activity Proxy points to growth of around 5 per cent year-on-year growth last quarter.”

Figures can lie and liars can figure and for all the talk about things being OK in the land of managed capitalism those in China who are in the know are getting out and taking their money with them. Expect to see the Yuan keep falling.