The slowing economy contributed to weakness throughout 2015 in China’s currency, which was weaker again on Wednesday after the People’s Bank of China unexpectedly fixed the midpoint rate at 6.5314 per dollar prior to the market open, even weaker than the previous day’s closing quote 6.5157.
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A Chinese clerk counts USA dollar and renminbi banknotes at a bank in Huaibei city, East China’s Anhui province, Jan 22, 2015.
The RMB’s weakness has been gathering speed, HSBC said in a research note, suggesting China’s forex policy could be becoming more flexible sooner rather than later. Those trading activities “have nothing to do with (China’s) real economy” and have only caused “abnormal fluctuations” in the currency, the central bank said.
China’s mammoth foreign exchange reserve (3.4 trillion U.S. dollars), sound economic fundamentals, commendable growth in labor productivity and determination to carry out necessary reforms to unlock vitality, will underpin the currency, said Xinhua. One point Hillary Clinton has been making is that America should invest more heavily – i.e., spend more money that is either taxed from Americans or borrowed from China and future generations -on both infrastructure and alternative energy.
Indeed, the two Asian BRIC economies, China and India, registered currency depreciations of 4-5 percent past year, while Brazil’s currency dropped almost 33 percent and Russia’s fell by more than a fifth.
In a statement on its website, the central bank said it was determined to keep the exchange rate stable to fend off speculative forces.
In addition to the economic slowdown in China, outside factors have also affected the yuan exchange rate, said Xie Shuiqing, a professor with the Finance & Economics College at Chongqing Jiaotong University.
“The market’s message was loud and clear, that more clarity and less flip-flopping is needed going forward”.
Shares in Asia were still on track for their biggest weekly fall in more than four months, but Friday’s advances seemed to reduce some of the fears that have hit global markets.
After a 10 per cent-plus drop in Chinese equities, an equally dramatic slump in oil and major volatility in other markets, a 2 per cent rise by Chinese shares helped Asia end higher for the first time in 2016. Although Rajan said he did not believe the actions from the PBOC were an indication of a long-term devaluation, he warned of the dangers if it were part of countries resorting to a process of getting competitive advantage through longer term depreciation. That brings last year’s total decline in foreign exchange reserves to $513 billion. “So there’s been a dramatic change”, from the days when China accumulated reserves in what was perceived by some as an effort to cheapen the yuan, Bergsten said.
The Chinese want the yuan to depreciate.
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On the other hand, because China’s economy is slowing the government needs cash.
