China bids for a cheap flexible yuan

Photo: AP

Central bank of China announced it had imposed new measures to tighten control over the yuan, AP reported. The main concerns of the central Chinese bankers were link to the increased currency rate in combination with the lack of flexibility of the yuan. The commercial lenders operating in China were ordered to hold more of their foreign currency as reserves in the central bank to limit sales after the yuan hit a four-year high of 6.3674 to the US dollar.

The People’s Bank of China (PBoC ) is trying to deter speculators after the yuan rose by about 12% against the dollar since May. The ruling Communist Party said in 2015 it planned to make the yuan a “freely tradable and freely usable currency” by last year. But it has kept controls in place due to concern about swings in the exchange rate and the flow of money into and out of the world’s second-largest economy. “It looks as if the PBoC still wants to stick to the idea of exchange rate liberalization,” said Iris Pang of ING in a report, quoted by AP. “But this is difficult to achieve if the PBoC doesn’t like speculators,” Pang said. “A market consists of FX users and investors, including speculators.” The order raised the amount of their foreign currency reserves banks must keep on deposit with the PBoC from 5% to 7%. That change, the first since 2007, will lock up about $20 billion of their $1 trillion in foreign currency, according to Macquarie Group. The increase is a “strong signal” that policymakers are “increasingly uncomfortable” with the speed of the yuan’s rise, Macquarie said in a report. The surge in the yuan’s value threatens to make China’s goods more expensive in foreign markets, hampering a manufacturing revival following last year’s slump. A stronger yuan would make imported oil, iron ore and other raw materials cheaper for Chinese manufacturers following a rise in global commodity prices. But Monday’s order suggested regulators are less worried about that than about financial stability.

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