After the Chinese authorities continued the debate on the 2017 Economic Agenda at the Central Economic Working Conference in mid-December on the terms of maintaining a stability that should see confirmation a 6,5% GDP growth target for 2017, it seems clear that this level would also allow the achievement of the long-term objective that they had set themselves on doubling of per capita income by 2020, as reiterated by the 18th Communist Party Congress held in 2012, and looking towards the 19th to be held this year.
But it's the prudential attitude towards financial and market risks which characterizes the preventive action of the Chinese Government in this period of political transition between the two Congresses, so much so as to require a package of extraordinary measures launched precisely on 31 December, very stringent and mandatory measures for all banks and financial institutions starting from XNUMX July, with particular attention to currency transfers.
Drastic measures on capital controls and transparency of financial transactions which have as their purpose not only fight against money laundering of money but also bring the phenomenon of shadow banking under control which continues to cause concern. The extent of the intervention clearly has an important structural implication that goes far beyond mere capital control and is a sort of safety measure for the entire financial system in view of the complete liberalization of the yuan.
The limits introduced concern both natural persons for domestic or cross-border exchanges and transactions, and in this case with a stake linked to a value of 10 euros, and companies, which will be subject to limitations equal to 200 US dollars. While cash transactions are capped at $10 per transaction.
In 2016 the Chinese Stock Exchange closed with a loss of 11%, Of which a 9% to be charged to the Trump effect which includes not only the opening of the US rate hike cycle but especially the threat of retaliation on business dealings in defense of American industry. Although the Chinese Beige Book shows an improvement in the world's second-largest economy in the fourth quarter in almost all industrial sectors, with profits and producer prices recovering after four years of deflation, the problem remains linked to the impact of what has been said on profits of Chinese corporates and hence the need for a proactive fiscal policy and a prudent and neutral monetary policy to avoid new bubbles by containing the Trump effect.
While most analysts, after data on foreign exchange reserves which he saw break the psychological threshold of 3 trillion dollars (the drop in December of 41.1 billion US dollars brought the total to 3.01 trillion), point to a depreciation of the yuan up to an equilibrium level close to between 7,2 and 7,5 against the dollar by the end of the year. A further loss of international reserves would accelerate capital outflows and would therefore be needed also accelerate on the free floating of the currency to prevent the Central Bank itself from failing in its prerogative of independence in the action and prevention of disturbances on the currency market or worse that it suffers the effects thereof.
Such a determined and sweeping move, including capital controls, was therefore inevitable, given the situation and forecasts of further depreciation of the yuan, and in remembrance of the black period of the Asian tiger crisis and what Malaysia did not care about the diktat of the IMF. So the news of the introduction of new rules on cash transactions to reduce volatility on capitals did not surprise the market too much at the beginning but made the price of Bitcoin soar.
Another important decision concerns CFETs currency basket update (China Foreign Exchange Trade System) RMB Benchmark Currency Index relative to the yuan, which led the number of uniforms from 13 to 24 with effect from XNUMX January, with an annual adjustment linked to the performance of foreign exchange reserves. Among the new entries are the South African rand, the dirham, the Saudi ryial, the Hungarian forint, the Polish zloty and the Turkish lira, perhaps representing an excessive expansion but always with a view to giving greater balance to the Chinese currency.
Previous interventions and attempts by the Central Bank of China, implemented in the second half of 2016, concerned liquidity restrictions but they had done nothing but cause an acceleration of the default of some corporates, which depended on the supply of system liquidity. Meanwhile the Chinese uniform surpassed the Canadian one as a share in global trade, but the race for success in global trade takes a long time while that of uncontrolled devaluation is likely to be one of the biggest worries of mind of 2017 as it was in the summer of 2015.
So the forecast for the end of 2017 for one yuan closer to 7,5 on the dollar remain intact, as well as a continuation of the path of devaluation for next year, while the reaction at the beginning of the year was unexpected when there was a leap in the CNH from 6.9697 on 2 January to 6.78 on 5 January, then returned partly on the 9th to 6.8766, pushing volatility to the highs of August 2015, a date linked to a collapse of the markets due precisely to the devaluation of the yuan, a sword of Damocles that will still accompany us for the current year.
