Is It Time to Panic about the Chinese Yuan?

Last week we looked at Chinese capital outflow and diminishing Chinese foreign currency reserves in our article What Is a Trillion Dollars in Yuan? We quoted Investor’s Business Daily and their article about Chinese capital outflows.

China’s capital outflows jumped in December, with the estimated 2015 total reaching $1 trillion, underscoring the scale of the battle facing policymakers trying to hold up the yuan amid slower economic growth and slumping stocks.

The entire year’s estimated trillion-dollar total was more than seven times 2014’s $134.3 billion, a record for Bloomberg Intelligence data dating back to 2006.

“Outflows are likely to remain strong because the People’s Bank still has not been able to generate confidence among investors that it knows what it’s doing or that it’s able to achieve its policy objectives.”

Is it time to panic about the Chinese Yuan? How badly will capital outflow hurt the Chinese economy and how far down will it drive the Yuan? An alternative view is voiced by Goldman Sachs.

Don’t Panic about the Yuan Just Yet

Bloomberg Business quotes Song Yu a Beijing-based economist working for a Chinese subsidiary of Goldman Sachs. Mr. Yu has been the best overall forecaster of China’s economy in the last two years. The message is don’t panic about China’s slowdown.

Growth will slow to 6.7 percent in the first three months of this year as financial services contributes less to the expansion than a year ago and because policy measures to support growth have tapered off from the last quarter of 2015.

Even though full-year growth will drop to 6.4 percent in 2016 as wages, employment and consumption “take a hit,” Song says he’s not negative about China’s economic prospects and dismisses dire predictions of a coming collapse.

Mr. Yu makes the point that China has a lot of tools left in its tool chest to help stimulate the economy such as reducing the required down payment for purchasing a house or apartment to 20% from the current 25%. While imports have fallen 18.8% and exports have fallen 11.2% from a year ago Mr. Yu states that the economy is not in danger of collapse, rather it is in a period of adjustment. He view would be that it not time to panic about the Chinese Yuan although capital flight will probably continue for some time and the Yuan will fall.

Trading the CNY

Yuan trading onshore in China is not available to Westerners but offshore is and is available in several markets worldwide. Where is the CNY going in the short term and where is it going in the long term? It appears certain that the Yuan will decrease in value versus the USD and certainly the YEN but it will probably not be a steady decrease because according to The Wall Street Journal says that China favors flexibility in managing the Yuan.

China’s yuan had its biggest jump against the dollar in more than a decade on Monday, as Beijing keeps markets off guard with a shifting approach to managing its currency.

The central bank is keeping its options open, swinging between its pledge to attach the yuan’s value to the currencies of its major trading partners and, when that works against it, re-pegging it to the dollar.

Since mid-January, the People’s Bank of China has quietly re-hitched the yuan’s value to a weakening dollar, despite vowing just a month earlier to use multiple currencies as the yuan’s reference points.

For investors, China’s opportunistic approach sows confusion, which has led to volatile trading. On Monday, the central bank suddenly guided the yuan sharply higher.

As such you can simply assume that the Yuan will fall in value over time, buy dollars with your Yuan and wait or attempt to trade very peak and valley of the Yuan’s eventual decline.