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Why you should expect a weaker, less free Chinese yuan as US Fed gears up to raise rates

The yuan, mainland China’s currency, is set to become less free as it weakens against the US dollar.

While Beijing has not announced any blanket capital account controls, the central government is stepping up its oversight and analysts say restrictions on flows of yuan and US dollars across the border, especially outward flows, are set to become stricter.

China’s yuan hits fresh lows, continues descent past 6.9 against greenback

Beijing’s retreat from yuan liberalisation comes at a time when the currency is under pressure to weaken further as the US Federal Reserve hints at an interest rate increase next month. At home, the central government’s currency policy priority has shifted to “risk control” and is likely to remain there in the coming year as the Communist Party’s top leadership prepares for a power reshuffle.

Larry Hu, chief China economist at Macquarie, said capital account opening would not be a key subject at next month’s central economic work conference, an annual year-end gathering of communist leaders that lays out economic policy priorities for the coming year.

With people betting on a weaker yuan and many mainlanders scrambling to move their wealth abroad, Hu said “a very strong hand is visible there to curb capital outflows.”

Shenzhen customs said it had uncovered 1,012 cash smuggling cases in the first 10 months of this year, as individuals tried to smuggle cash out of the mainland in suitcases and handbags. A senior official with the Shanghai branch of the People’s Bank of China, the mainland’s central bank, said on Wednesday that it would crack down on capital flight and closely monitor abnormal capital flows via the city’s “free-trade zone”.

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Meanwhile, the yuan’s depreciation against the US dollar has been accelerating over the past few weeks and it is now at its weakest level in more than eight years, with the yuan-dollar exchange rate at 6.9.

“A fresh yuan crisis is not inevitable … but the risks of another bout of turbulence remain high,”

Capital Economics economists Julian Evans-Pritchard and Liu Chang wrote in a research note.

In an article published in Shanghai Securities News this week, former central government adviser Yu Yongding said capital control would need to be maintained and enhanced as Beijing permitted steeper yuan depreciation.

Possible new measures from Beijing could include continuing to hold back on approving new outbound investment quota under the qualified domestic institutional investor scheme, slower approval for outbound investment deals, and lowering the cash withdrawal limit for mainland bank cards used overseas.

“I won’t be surprised if Beijing takes further steps to stem capital outflow,” said Yan Se, a senior economist at Standard Chartered. “At the same time, Beijing may not announce any measures but become stricter in implementing existing controls.”

Shanghai FTZ to step up monitoring of capital flows to stabilise the yuan, PBOC says

Guo Lei, an analyst with GF Securities, a mainland brokerage house, said he would not expect a good “time window” in the next two years for Beijing to create a freely usable currency.

The yuan’s official inclusion in the International Monetary Fund’s Special Drawing Rights currency basket on October 1 had therefore marked a temporary halt to yuan liberalisation rather than a new start.

The yuan’s share of world trade finance has dropped to 4.61 per cent, about half the level three years ago, Swift, the global financial network used by banks to transfer capital, said on Wednesday.