BUZZ-COMMENT-China is allowing more yuan flexibility for a reason

Credit: REUTERS/KIM KYUNG-HOON

The Chinese central bank's weekend pledge to liberalise the yuan came from a position of strength [nL1N2HF01N], and that's an important consideration for where the currency might head in the near term.

Oct 26 (Reuters) - The Chinese central bank's weekend pledge to liberalise the yuan came from a position of strength , and that's an important consideration for where the currency might head in the near term.

Shortly after the yuan hit a 27-month peak against the dollar last week, China's foreign exchange regulator announced plans to allow more outbound investments . That might help offset the FX impact of a rush into red-hot Chinese listings , but promoting greater market volatility can cut both ways.

As Chinese leaders gather to discuss the 14th five-year economic plan , analysts expect less emphasis on a fixed GDP growth target. How the yuan might play a role in spurring domestic demand - a key tenet of President Xi Jinping's "dual circulation" strategy - could also make the agenda. A strong yuan would run counter to this goal by encouraging more overseas spending.

Ditching growth targets implies less fiscal stimulus ahead, which could be a short-term negative for the yuan if investors cash out positions predicated on China's economic outperformance. The yuan would then cede some ground, alleviating pressure on Chinese exporters.

A self-balancing yuan is Beijing's ultimate goal. Now that the yuan's trade-weighted index is above a long-term moving average, the time may be right to loosen the leash.

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YuanIndex: https://tmsnrt.rs/3kv6zIT

CNYweekly: https://tmsnrt.rs/3dWS7a5

(Ewen Chew is a Reuters market analyst. The views expressed are his own.)

((ewen.chew@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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