Chinese Yuan

China hints at possible change in long-standing yuan policy

Beijing – China could possibly working towards liberalising its long-standing yuan policy in a bid to alter course on exchange rates amid US President Donald Trump’s threats of a trade war.

China has, for the first time, included the requirement to ensure the stable global status of yuan as one of its major tasks, dropping the line “keeping a stable yuan at a reasonable and balanced level” which was included in the previous three reports, reports in the local Hong Kong media indicate.

Chinese Premier Li Keqiang noted in the report that they will be further liberalising the renminbi exchange rate to ensure that currency’s stable position in the global monetary system is maintained. These new wordings in the report indicate that Beijing will be more tolerant of yuan exchange rate moves against the dollar and gradually reduce its intervention in the foreign exchange market this year.

Trump has labelled China as a currency manipulator – a strategy it adopts to garner unfair advantage from exports and even threatened to impose tariffs on Chinese goods.

China could be concerned for the fact that its currency is losing its appeal for investors, even though it had obtained a nominal reserve currency status from the International Monetary Fund (IMF), thanks to the Chinese government’s tightened capital account controls and the prospects of weakening against the USD.

Beijing’s efforts to make the yuan an international currency were largely shelved in the past year. In Hong Kong, the primary offshore yuan market, yuan deposits at the end of 2016 dropped 46 percent from a peak in December 2014, the report said. The value of international payments in yuan, released by payments processor Swift on Thursday, fell 29.5 percent in 2016, while the yuan’s share in international payments dropped by 0.63 percentage points to 1.68 percent at the year’s end.

The costs for Beijing to defend a “stable” yuan exchange rate are getting dearer after China burnt USD one trillion of its foreign exchange reserves in the last two years to bolster the yuan’s value.

China’s forex reserves, the highest in the world, fell below USD three trillion for the first time in six years sparking concerns over their rapid decline.

Forex reserves stood at about USD 2.99 last December, down from about USD?3.01 trillion. The persistent decline of China’s forex reserves has caused widespread concern about the country’s overall financial stability, as the diminishing stockpile, still the world’s largest, is perceived as shielding the economy from currency and foreign trade volatility.

A state-run think tank in a rare criticism accused the central bank, the People’s Bank of China (PBOC) of playing “dangerous game” of selling the reserves to defend weakening yuan.

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