As much as $1 trillion has left the country—and the pressure is mountingby George Magnus / January 12, 2016 / Leave a comment
It has fallen about 1 per cent since the beginning of the year, it’s about 2 per cent lower than after a wobble last summer and about 5.5 per cent lower compared with the weeks before that. Most people wouldn’t blink if this was anything but the Chinese currency. But the Yuan has become “hot” again in financial markets, partly because of mounting concern that it might tip the world economy into another global recession.
How could that be, you might ask, if it has moved so little, and especially since the People’s Bank of China, the Chinese central bank, maintains a tight grip on the currency market and on capital flows in—and especially out of—China. As if to prove the point, the central bank intervened in the so-called offshore market in Yuan, known as the CNH market, to stabilise the falling currency by pushing overnight interest rates up to over 13 per cent on Monday, and 68 per cent today. People who had “shorted” the currency would have been well and truly squeezed into submission. For the first time since late last summer, the wide difference between the CNH rate and the on-shore rate, called CNY, was eliminated. Anyone who still believes the Chinese currency system is gradually being liberalised needs to take another look at what just happened.
But what is spooking investors is a quartet of complex uncertainties. First, technical and incremental changes to the management of the exchange rate system since last summer have not succeeded in bolstering confidence in the Yuan, which is reflecting deeper economic and financial concerns.
Second, the People’s Bank of China’s preference for Yuan stability against a broad range of currencies that permits some limited depreciation against a strong US dollar is not a consensus or uncontested view in Beijing. Behind the scenes, some seem to favour a more aggressive decline.
Third, periodic capital flight could make it difficult for the PBC to hold its line. Last week, it was announced that China’s foreign exchange reserves had dropped by over $512bn in 2015. Given that China earned about $600bn from international trade and net…