Reforming the Yuan

The Yuan has declined by four percent during the last quarter of 2016. This is much quicker than it was previously thought. The cause of such a decline is the rise in tensions within foreign exchange markets. The markets are in turmoil over the rising debt in China and the bubbling property market. The Chinese government has tasted success in growth stabilization but at the expense of interventions, capital controls and hefty lending procedures.

Yuan and US dollar

Not long ago, the Yuan went up against US dollar. The Chinese central bank, People’s Bank of China, has encouraged the Chinese banks to forbade giving funds to other banks, resulting in tightened liquidity. The result is that overnight lending market surged from about 17 percent to reach about 61 percent within a span of two days. This caused the Chinese currency to go up in an offshore market. Of course, there is a price to do all of this. The foreign exchange reserves of the country dropped to $3 trillion in December. This is the lowest from spring 2011.

In 2014, the Yuan was still hovering near six for every dollar. With the deceleration of the Chinese economic growth, there was a continuance of debt taking. Rates were increased by the US Federal Reserve and the Yuan subsequently weakened to trade at 6.95 for every dollar in 2016. When it approached seven for every dollar, the currency began to be supported by the Chinese central bank.

China now must re-balance at the time of deleveraging substantial local debt. It means that the country must balance actions between the depreciation of the Yuan and actions to protect the currency.

Risk and growth

The exchange rates suffered renewed pressure as Chinese investors and companies have diversified their risks and tried reduction in the Yuan stakes. The authorities then tightened controls on the Chinese companies and also on investors who have parked their money out of the country. China, by this manner, barely stabilized their currency- but all this came through paying a price. At the time of worldwide financial crisis, the huge stimulus by China boosted investor confidence and gave much needed support to infrastructure growth, thus preventing world wide depression. Excessive liquidity, however, led to the speculation in the property and equity markets. Even though the present credit target is 13 percent-twice the growth rate, it is not possible for China to rely any more on growth made possible any ample quantities of credit.

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