China's currency has lost almost 6 per cent of its value against the US dollar since the beginning of 2016, arousing fears of further depreciation. Much has been said and done about the renminbi, with the International Monetary Fund (IMF) last year giving the currency a vote of confidence with its inclusion in its basket of reserved assets, the Special Drawing Rights (SDR), effective from October this year. But since the beginning of the year, capital has been moving offshore and recently China's State Administration of Foreign Exchange (Safe) has made several moves to shore up the currency and control outflows by announcing that capital account transactions exceeding $5 million from corporate bank accounts must be reported to Safe, as reported in The Corporate Treasurer. 

These capital controls are the Chinese government's way of stemming the outflows, which have amounted to $530bn in the first nine months of 2016. The boom of investment and capital inflows into China, encouraged by the yuan's appreciation over the past decade, is now over.

Capital exodus

The Financial Times wrote yesterday – Managing the inevitable decline of the renminbi – that concerns over “slowing growth, a mountain of corporate debt, recurring asset price bubbles and President Xi Jinping’s anti-corruption drive” are fuelling a capital exodus from mainland China. The newspaper adds that the result is “a grinding depreciation, giving companies and individuals yet more reason to pull money out.”

The FT goes on to speculate that one measure the Chinese government could take would be to allow a one-off devaluation of the yuan, which could stem outflows as investors would no longer expect any further fall. It could also remove the managed floating rate, which sees the Chinese currency valued according to a narrow range, related to a basket of currencies – and this would have much the same effect as a one-off devaluation. Douglas Bulloch, writing for Forbes, explains why the yuan's depreciation in recent years is causing such a problem for the Chinese government and for foreign investors (Why China's Falling Exchange Rate Undermines Their Reserve Currency Ambitions).

Corporate treasurers will be keenly following these developments and assessing how to manage their own exposures with regards to the yuan and any operations in or with China.