Yuan Fundamentals Under Threat as External Surplus Shrinking

A strong balance of payment history underpinned the Chinese yuan’s strength this year, but recent data indicates that a reversal is underway.

China’s external deficit in the third quarter – only its third this century – marks notably weaker fundamentals for the yuan and raises questions over its strength, Credit Agricole said in a report.

Last week, China’s State Administration of Foreign Exchange (SAFE) reported a capital account deficit of $81.6 billion for the July-September period and a current account surplus of $81.5 billion.

“When you look at the numbers, the current account surplus was still smaller than the capital account deficit, so, technically speaking, that puts the third-quarter balance of payment in a deficit,” Dariusz Kowalczyk, senior economist/strategist Asia ex-Japan at Credit Agricole, told CNBC.

Twin current and capital account surpluses were a key factor behind the yuan’s over 2 percent rally against the greenback over the past six months, which defied broad dollar strength. The current account surplus hit $80.5 billion, while the capital account surplus totaled $77.8 billion in the first half of the year, SAFE data showed in September.

“Now in a very rare turn of events, this external surplus is disappearing and I think it will last for a while,” Kowalczyk said.

via SOURCE

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza