Offshore Yuan Soars Most In One Year On Fears Of Capital Controls

Following last night’s trial balloon by the PBOC, when as reported overnight the PBOC was studying possible scenarios of yuan exchange rate and capital outflows in 2017 based on models, stress tests and field research, and is preparing contingency plans, the Offshore Yuan has reacted accordingly, and soared by 0.9% to as high as 6.8950 per dollar as of 7:20pm in Hong Kong. That was the biggest increase on a closing basis since Jan. 11 last year.

Meanwhile, the onshore yuan up 0.3%, most since July. As shown in the chart below, the spread between the two is now the most negative since the start of 2016.

“China has been challenged by capital outflows and declining foreign-exchange reserves, and policy makers are taking measures to solve the problem,” said Eddie Cheung, a Hong Kong-based foreign-exchange strategist at Standard Chartered Plc, the most accurate forecaster for Asian emerging-market currencies according to a Bloomberg ranking. “Funds will continue to exit in the first half due to individuals’ purchases of the dollar and on concerns of U.S. political uncertainty.”

As further reported, in a familiar twist, China warned it may also further sell U.S. Treasuries in 2017 if needed to keep the yuan’s exchange rate stable, Bloomberg’s sources said, adding that the size of the reduction will depend on capital outflows and market intervention. The nation’s holdings of Treasuries declined to the lowest in more than six years in October as the world’s second-largest economy used its currency reserves to support the yuan.

For now, concerns of a full-blown clampdown are working, forcing yet another short squeeze in the yuan, although as usual the question remains how much of what the PBOC has warned about is it actually willing to implement, as it remains trapped: should it implement aggressive capital controls it will benefit the Yuan in the short end, however it will only lead to further capital flight in the longer run as concerns spread among the local population of what it is the PBOC is concerned about. Sure enough, earlier this morning Bitcoin hit $1,090 in US trading, the highest level in three years as capital flight using the digital – and still unregulated – currency continues.