Yuan Tumbles as Capital Outflows Continue

The Chinese yuan successfully broke through a significant support level late on Monday, as investors kept a nerve-racking watch on the currency. The yuan also fell as a result of the economic uncertainty posed by the declining currency.

The yuan edged below 6.7 to the dollar on monday, a level it has not been under for more than 5 years, but managed to recover some of its losses on Tuesday. Analysts predict a further decline of the currency later this year.

"The second quarter growth figure came in slightly better than expected, but there is still a lot of uncertainty about the outlook for the second half," said Steven Leung, director at UOB Kay Hian in Hong Kong."It's not easy for the China market to move above 3,000 without some fundamental improvement."

But some believe that the worst will soon be over, Svenska Handelsbanken, one of the yuan's top analysts states that, "The People’s Bank of China will hit the brakes on depreciation to avoid sparking global volatility and exacerbating capital outflows."

But evidently, signs of the yuan weakness reducing or what appears to be the currency displaying a fighting chance is apparent, we saw a short recovery of some of the losses it made against the dollar last week; which brought 5 consecutive weeks of losses to an end, and witnessed a late revival in the dollar right after the pullback.

But oddly the fall of the yuan has skillfully avoided inciting another panic like the ones witnessed in August and January when yuan weakness angered markets worldwide leading to speculative bets against the exchange rate.

Rumors that policy makers were guiding the decline against the dollar in a bid to improve exports and renew economic advancement leaves the yuan delivering Asia's biggest free-fall this year.

In spite of showing a sparsely higher-than-expected for the second quarter last Friday, a rise in the currency was even more reliant on larger construction activity caused by the housing boom and a building spree of government infrastructure.

Housing costs increment decelerates for the second consecutive month as data show property investments cooling for the month of June. All these factors continue to fuel uncertainty in the Chinese economy, in addition to these factors the yuan is also being affected by weak trade and capital outflow.

Data from GDP and retail sales currently incite hopes that the economy will soon reinforce and their financial authorities would desist from assertive easing.

$1 trillion was estimated to have exited China last year in capital outflow as the yuan's sudden depreciation caused local investors to turn their sights to foreign ventures and firms to settle their foreign debt. Monthly outflow decelerate as estimations put it at $68.6 billion through May this year, compared to $113 billion in the second half of last year, FOREX reserves have also surprisingly increased in June, signifying that the current decline might be nearing completion.