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Things are not looking all that great for the Yuan right now. After reaching an eight-year low overnight, investors are growing concerned about this fiat currency. Chinese banks slashed their forecasts for the exchange rate as well. A looming Federal Reserve interest rate hike is driving the Yuan down, and further lows are on the horizon.
Anyone holding a portfolio containing Yuan will be more than concerned right now. With a plummeting value, things are not looking all that great. Overnight, the Yuan reached its lowest point since December 2008, and further declines are expected. At the same time, the US Dollar continues its bullish run throughout 2016.
Another Bad Day At The Office For The Yuan
These concerns are fueled by the looming Federal Reserve interest rate hike. A stronger US Dollar will automatically lead to a weakening yuan, forcing banks to lower their forecasts. So far, at least five major banks have lowered projections, and more are expected to follow over time.
RBS Group PLC’s Chief Greater China Economist Harrison Hu stated:
“The pressure for the yuan to decline could be stronger next year as Trump’s policies could lead to a dollar rally and amid concerns about China-U.S. trade relations. The People’s Bank of China can curb high volatility with stronger fixings and intervention, but it won’t do so unless outflows surge, as such measures could add great pressures to the foreign reserves.”
This news will only increase capital outflows in China, hurting the economy even further. In September of 2016, US$44.7bn worth of yuan payments exited the Chinese economy. Plugging loopholes to circumvent capital controls have been undertaken, yet provide little relief so far. Interestingly enough, the Chinese government focuses on Bitcoin transactions used to move funds out of China.
Investors flocking to Bitcoin explains the recent price increase of the popular cryptocurrency. In fact, it appears Chinese investors are driving the price up even further. Bitcoin looks very bullish right now, and no one knows what will come next. One thing’s for sure: though: investors will find a way to access alternative financial solutions.
For now, it seems unlikely the PBOC will do something to artificially stabilise the yuan exchange rate. Such a decision would only give Donald Trump further ammunition to label China as a currency manipulator. A very tense situation for residents and investors, that much is certain.
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