We tell you why strict control of regulators over the yuan is not going anywhere.

In China, there has always been a flexible attitude towards the law. A huge population, a shortage of land and a long tradition of authoritarian rule - as a result, your opportunities largely depend on who you are and with whom you are familiar.

In addition, unlike most major economies, China strictly controls cash flow in the country and abroad and actively manages the yuan exchange rate.

Every day, the People's Bank of China sets the daily trading range of the yuan's price in dollars and, if it changes too quickly, actively intervenes in the foreign exchange market through state-owned banks.

Many investors hope for a new round of reforms after the re-election of Xi Jinping for a new five-year term at the upcoming congress of the Communist Party, which will begin on Wednesday, and within the framework of these reforms - to move to freely floating currency.

In practice, the chairman and his allies are engaged in saving state-owned companies and banks in China, which depend on the flow of cheap capital.

While key public sector enterprises can not survive without inexpensive financing, allowing capital to leave the country freely is too risky, so strict control of the yuan in one form or another is likely to continue.

Meanwhile, all this capital, locked in China, will continue to inflate bubbles in real estate, stocks, raw materials and any other goods, distorting the real picture of the development of the economy.

The control over the capital will gradually decrease as the internal assets improve, and become tougher if the outflow is too high. So the real "reform" will not be directed forward, but sideways.

The main problem facing the Chinese regulators is obvious: the country annually saves 46% of its GDP, much more than the US and most major economies, but it is becoming increasingly difficult to find attractive investment opportunities at home. Since the boom of the late 2000s and early 2010, the average profitability of traded on Chinese stock exchanges fell by about 30-50% - the economy has slowed, and the reforms have come to a standstill.

At the same time, interest on deposits is very low, and real estate in large cities costs insane money, which creates problems for the aging population, which needs to save money. At the same time, even in good times, some part of the capital seeks out of the country. Despite the state control over the currency, it will still circulate, and the rules will shift.

This year, the yuan rose by only 5% amid tightening controls on capital flow, set in 2016, slower than expected, higher US interest rates and accelerating China's economic growth. But the experience of 2015 and 2016, when the country's four-trillion foreign exchange reserves declined by about a trillion dollars, when capital fled the country, and the central bank struggled with currency speculators, shows that the real priority of the government is control over the economy.

As a result, the yuan, probably longer than expected, will play an insignificant role in world finance. According to the Swift system, in June, less than 2% of international payments were denominated in RMB - much less than two years ago. China may be the second largest economy in the world, but instead of competing with the US dollar for world domination, the yuan competes with the Canadian dollar and the Swiss franc in the second league - and this is unlikely to change in the near future.

Source: The Wall Street Journal

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