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China Has A Problem With Outflows: It's Costing Billions To Keep The Yuan's Price

Javier Hasse

Autonomous Research partner Charlene Chu is one of the most respected experts focusing on China and its debt. So, when her predictions for 2017 came out, the world listened carefully.

One of the most notable warnings was related to outflows — meaning money going out of the Chinese economy and thus driving a depreciation of the yuan.

"China's authorities have chosen to pursue harsher measures against capital outflows over a large change in the exchange rate to address the country's outflow problem, at least for now,” she explained. “This could work for a few quarters, but we think closing the gates is not feasible over the long run for the largest trading nation in the world with a USD$33 trillion banking sector.”

Consequently, Chu anticipated a deceleration in growth in the second quarter of the year, “as a weaker credit impulse passes through.” Nonetheless, the expert added, “this is of secondary importance to outflows and the currency.”

Taking into account that, as per Chu’s estimates, the People's Bank of China spent about $800 billion in foreign-exchange reserves to keep the yuan’s price in 2016, the $3 trillion reserve could dry up in a few years, and this is certainly concerning, she continued.

The analyst also noted that the People's Bank of China will likely hike interest rates during the year to keep some of the money in the country and incentivize outside investors — seeking to counter the M&A wave seen among Chinese companies.

Yuan ETFs like the WisdomTree Dreyfus Chinese Yuan Fd (ETF) (NYSE: CYB), the Market Vectors Chinese Renminbi/USD ETN (NYSE: CNY) and the Guggenheim CurrencyShares Chinese Renminbi Trust (NYSE: FXCH) have lost 3.1 percent, 2.6 percent, and 4.75 percent, respectively, over the past three months. Meanwhile, the currency itself has slipped 3.75 percent.

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