China central bank advisers rally behind beleaguered yuan as Trump threat looms

SHANGHAI (Reuters) - In what appeared to be an effort to shore up investor confidence in the beleaguered Chinese yuan, a phalanx of central bank advisers signaled their readiness to defend the currency and said a stabilizing economy will temper future depreciation pressure.

FILE PHOTO: A customer counts Chinese Yuan notes at a market in Beijing, China August 12, 2015. REUTERS/Jason Lee/File Photo

In November, the yuan CNY=CFXS hit an almost 8-1/2 year low against a broadly strengthening dollar, forcing authorities to tighten outbound investment as they scrambled to staunch capital outflows.

But recent data showing a stabilizing economy have provided some support to the yuan.

Fan Gang, a member of the central bank monetary policy committee told the China Securities Journal that the latest economic data showed the Chinese economy was stabilizing.

Deflation had ended, and overcapacity and corporate debt issues were starting to get resolved, Fan was quoted as saying.

“If next year’s economic growth would be higher than 2016, it would show that the economy has already bottomed out and would enter a recovery period,” Fan said.

China posted its strongest retail sales growth of the year in November, while surging steel production lifted factory output though private investment began to slow again, leaving the economy more reliant on state spending amid mounting debt.

The fears about a rush of capital from the world’s second-biggest economy has been fed by Republican Donald Trump’s upset Nov. 8 election victory. The New York billionaire’s campaign threats to slap high import tariffs on Chinese goods and label Beijing a currency manipulator on the first day in office on Jan. 20 have stoked uncertainty about the yuan’s outlook.

The yuan has already lost more than six percent to the dollar so far this year, pressured by a broad rally in the dollar on the back of bets that Trump’s policies will set U.S. growth on a higher gear, and prompt the Federal Reserve to raise rates at a faster pace.

The Fed is all but certain to raise rates when the two-day meeting ends later on Wednesday.

China’s yuan was slightly weaker against the dollar in trading on Wednesday, fetching 6.9049 at midday, after the central bank lowered the midpoint.


In the same article, Sheng Songcheng, an adviser to the People’s Bank of China, said he was opposed to a free float of the yuan as that would bring limited incentive to exports and economy while bring negative impacts to imports.

“Once the public’s confidence in the yuan gets hurt, the economy will be hit hard, and the foreign exchange reserves would also be hard to protect,” Sheng was quoted as saying.

China currently operates an administered peg exchange rate system, whereby the yuan-dollar exchange rate is allowed to fluctuate by 2 percent either side of a midpoint fixed by the central bank each day.

The government has said it’s ongoing markets reforms target full convertibility for the yuan but no specific timeline has been set.

In December, Beijing said it would allow limited convertibility of the yuan in free trade zones in Guangdong, Fujian and Tianjin, in a move to further liberalize its capital account after its currency was admitted to the IMF’s reserve basket.

The official paper also cited former central bank advisor Yu Yongding as saying the central bank should appropriately intervene in the foreign exchange market while strengthening capital controls.

“Therefore, we can avoid from using excessive foreign exchange reserves to intervene in the forex market,” Yu said.

Chinese officials often say there is no basis for yuan depreciation, with PBOC vice governor Yi Gang saying on Nov. 27 that current conditions point to a stabilisation of the yuan.

“We can see such voices everyday, and it’s useless to just offer some verbal defense...The impact from authorities’ vocal support for the yuan is very limited. The dominate power in the forex market is corporate dollar purchases,” said a trader at a Chinese bank in Shanghai.

China’s foreign exchange reserves fell far more than expected in November to the lowest level in nearly six years, as authorities struggled to stem capital outflows.

Reporting By Winni Zhou and John Ruwitch; Editing by Shri Navaratnam