The international expert community keeps on discussing the situation around the Chinese economy and national currency. A major London-based investemnt fund named Omni Partners says that the Chinese Yuan has all chances to devalue 30-34% this year, thereby continuing the tendency started last year. With that in mind they expect the Renminbi to devalue at least 15% in 2016. This is the lowest expected threshold.
We must confess that this is a very likely scenario since despite the fact that the existing Chinese authorities has been doing their best to curb the devaluation of this nationa currency since 2015, they are still affecting external trade fators. The previous forecast used to imply a more modest drop by 7-7.5% over the next 12 months. However, now it looks too optimistic and the revised forecast is 15% to 34%. The thing is that the beginning of 2016 wasnt' a good start for China, thereby revelaing new challenges for the Chinese economy ans well as its national currency.
Itis quite natural that amid a weaking national currency as well as an economy that is slowing down, there emerge new challenges. Firt of all, this leads to a flight of capital and a decline in investment and business activities. Meanwhile, China's gold reserves are shrinking. The strongest drop was seen in December 2015 while the government failed to overcome the challenge the way it should have done. Foreign investors have been fleeing China since late 2015, especially after the Fed raied the interest rate amd made dollar assets, including U.S. bonds more porfitable. Under such uncertaitny and volatility investors are going risk-averse and reducing their exposure to emerging marekts and other risky assets while seking safe-haven assets.
At the same time, as the Renminbi devalues, the local population is buying foreing currencies heavily, the same holds true for local businesses. At the same time, major Chinese exporters are not in a hurry to change their dollar revenues and buy the national currency, which creates extra challenges for the entire Chiense economy. The People’s Bank of China is current suffering losses by tring to back the Renminbi and prevent it from devaluing. At the sam time, the central bank banned 2 foreing banks operating in China from making external transactions. This ban is temporary and wil take effect until March 2016. However, nothing prevents the regulator from extending the period as well as the list of such banks. It is also interesting to note that the USDCNHY exchange rate varies in different parts of China. The most savvy Chinese purchase the Renminbi in Hing Kong and sell it back Shanghai to take profit.
