Depreciation pressure on yuan likely to remain this year amidst continued capital outflow

On Tuesday, China’s Ministry of Commerce stated that non-financial overseas direct investment (ODI) rose sharply by 58.7 percent year-on-year to USD 88.86 billion in the first half of the year.

The depreciation pressure on the yuan would continue to be there through 2016 in the midst of persistent outflow of capital, while the Chinese central bank is likely to intervene if required to curtail extreme movements in the yuan exchange rate, according to Scotiabank.

The PBoC might defend 6.70 level in the near-term to manage market expectations. The CFETS RMB Index seems to have stabilized recently along with USD/CNY fixing capped below 6.70 level in past sessions, noted Scotiabank.

Even if China’s retail sales and industrial production accelerated higher in June, the nation’s fixed asset investment growth decelerated to 9 percent year-on-year in the first half of 2016 as private sector investment continues to lose momentum.

In the first half of this year, private fixed-asset investment, which accounts for 61.5 percent of the total, grew 2.8 percent year-on-year, a drop from 3.9 percent rise seen in the January to May period of 2016.

China’s private firms are postponing spending that casts a shadow on the country’s economic growth in late third and fourth quarter of this year, said Scotiabank in a research report. Even if the economic growth of China was resilient in the second quarter, the annual rise in cumulative floor space sales of property markets might peak, added Scotiabank.

Moreover, the growth rate of China’s property investment, which is a main driver of recovery, slowed further to 6.1 percent in the first half of 2016 from a 7 percent rise recorded in the first five months of this year.