Any significant move in the yuan in any direction is cause for concern, as Beijing’s priority has been to engineer stability in its markets and economy ahead of a change in leadership next month at the 19th Party Congress. As such, China has been pulling all sorts of policy levers to temper volatility.
And of course, despite recent strength in the yuan, the reasons it weakened significantly last year haven’t gone away. A massive amount of money leaving China pushed the yuan down in 2016, as investors sought better returns elsewhere, prompting the government to tighten capital controls.
“While capital controls have helped to stabilize outflows, the desire for domestic residents to diversify into foreign assets is still strong,” said Wang Tao, an economist at UBS, said in a note on Friday.
If China’s economy starts to lose steam toward the end of the year, and the U.S. dollar starts to appreciate, both scenarios could spell trouble for the yuan.
On top of that, Wang said she expected trade tensions between the U.S. and China to rise, calling it the “biggest risk factor” for the currency next year.
