China’s central bankers tame the Yuan for now

November 3, 2015

China has stabilized the Renminbi (also known as Yuan) almost three months after the central bank shocked global markets with a devaluation of its currency. In a surprise decision on August 11th, the China’s authorities aggressively implemented measurers to devalue the Yuan, causing it to drop 4.4 percent against the US Dollar within a few days. Since then, the focus of the China’s central bank has been maintaining stability and assuring the market that intentional manipulation will be kept at a minimum. Thus, the promise of letting market forces play a greater role in setting the exchange rate remains an unlikely possibility in the near future.

As of November 1, 2015, the Chinese currency reached its strongest level against the U.S. Dollar since the People’s Bank of China (PBOC, China’s central bank) first steered the Yuan into devaluation in mid-August. This newfound stability has been funded from the country’s foreign exchange reserves, which fell by a record number of up to $181 billion in the third quarter alone. Nervous central bank officials have also tightened rules on outbound remittance in order to prevent an exodus of cash from mainland China.

This constant currency fluctuation phenomenon was nothing special in China back in the 1980s and early 1990s, when China’s economy saw a hard landing back then, but is a rare scene during the past decade or so. For the community that keeps a close eye on China’s investment moves, this devaluation phenomenon could kill a lot of contemplated outbound investment deals that the market has hoped for. For Chinese citizens who now opt for a diversified investment portfolio by making investments in offshore assets (real estate in particular), this could translate into more foreign exchange control or restrictions on outflow of funds from China.

The biggest concern among business owners in China is now how they can be sure to strike deals globally in a sensible way. While anticipating more devaluation of the Yuan, one logic move of the business community is probably converting the RMB cash into US Dollars, and using such US Dollars to do some deals. As a result, we will probably see more acquisitions of US based assets by Chinese businesses. One market sector that will be favored by Chinese investors will be no doubt real estate.

FuJae will be monitoring the Yuan devaluation situation as it develops.