Further pressure may be coming to the yuan
Citigroup's chief China economist, Liu Li-Gang, seems to think so at least. Liu notes that China's latest efforts to boost liquidity are starting to take a toll on the country's yield premium over the US and that will put "renewed pressure" on the yuan.
With the Fed continuing to hike rates, China's latest policies to safeguard economic growth is starting to see its yield advantage over the US erode with the 10-year yields spread now hovering at a 7-year low.
Citigroup estimates that the PBOC has pumped roughly a whopping $492 billion into the banking system so far in 2018 through OMOs and cuts in RRRs. And continuing with that tone will increase further pressure on the yield premium and that may potentially feed into further weakness for the yuan.
And despite a lot of emphasis being put on USD/CNY reaching 7.00, Liu certainly doesn't see that as a key level noting that "when needed, the yuan could be allowed to weaken".
Well, Chinese authorities have continued to put up the facade that they are still cracking down on financial risks and deleveraging but maybe it's not all what is hyped up to be. The eroding yield premium is certainly something to take notice of and capital flight is a serious risk for China should the trend continue.
That will help them with the trade war in some sense and it's a strategic play if they're abandoning efforts to deleverage in order to claim victory in another aspect of the economy. And that certainly won't be music to Trump's ears, especially if USD/CNY starts to move past 7.00.
