China clamps down on capital flight risk as yuan weakens

Chinese financial authorities have rolled out measures to stem capital outflows from the mainland.
Banks will be evaluated on the amount of yuan wired offshore and the volume of foreign currency sold.

The Nikkei Asian Review has put out an article that addressed the efforts for which China is seeking to prevent the collapse of the Yuan. This follows Trump's announcement a new round of tariffs on Aug 1 for which sent the Yuan through the psychologically significant threshold of 7 per dollar, an event not witnessed since 2008.

The article notes that the Chinese currency only weakened further, touching 7.17 yuan per dollar at one point Thursday - "The value of the yuan is projected to drop by roughly 4% during the entirety of August, the largest monthly margin since 2005, when China adopted the managed floating exchange rate."

"As China allows the yuan to depreciate to a level not seen in 11 years, financial authorities have rolled out measures to stem capital outflows from the mainland.

The new rules include stricter oversight of banks in times of capital flight and restrictions on real estate developers' access to foreign currency bonds. If the financial system is judged to be on the brink on instability, the State Administration of Foreign Exchange, or SAFE, will declare the situation "abnormal."

Under that assessment level, banks will be evaluated on the amount of yuan wired offshore and the volume of foreign currency sold. If the levels stray too far from the national average, the bank's grade will diminish. Such lenders will then face limits on banking activities."

FX implications

The value of the Yuan is vital to Asian currencies and EM-FX ina broader sense. The Aussie is a more liquid currency that reta traders use as a proxy to the trade wars and performance of the Chinese and woder global economy. If the Yuan is lower, the Aussie tends to track the price level lower as well and vice versa.

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