“It will test 6.5 a dollar by year-end”. Outstanding medium-term lending facilities stood at 490 billion Yuan at the end of August, and the funds will be used to helpout countries small businesses and the agricultural sector, said the central bank. Economist Larry Hu at Macquarie Group Ltd. puts the figure at $264 billion over the same period.
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This critical decision to devalue the currency was fuelled by two major factors: to meet the IMF’s market-based pricing demands for inclusion into the SDR basket, and to revive its fledgling economy.
But as recent events have shown, that compounds capital outflows and depreciation pressures, meaning the need for currency intervention and the resulting liquidity constraint may soon confront Zhou all over again.
Chinese companies have also become increasingly cautious about China’s growth prospects and expect the yuan to weaken with a “limited boost to business prospects”, according to a recent survey of Chinese companies by Standard Chartered analysts.
Rajendran says the strategy should be to continue to supply to established markets, even in the wake of currency devaluation. The West’s economic collapse in 2008 meant that this model could no longer function, and China began trying to grow consumption levels so that the domestic consumer might come to fill the hole left by the faded worldwide market. In our analysis, an easing of capital controls is the logical next step. Keep in mind that, in our analysis, China’s currency has substantially appreciated on a trade-weighted basis versus its peers and the drop we have seen is unlikely to have a major impact on China’s economy in the short term. By shutting the door to capital outflows, China increases the odds of capital finding its way into an investable asset, one that will display momentum properties and attract the herd looking for a quick buck. A Chinese individual isn’t allowed to move more than $50,000 a year out of the country.
Investors, however, have been able to find a way around these regulations, either by getting friends or relatives to remit foreign currencies overseas or by inventing fake invoices that allow them to send more money offshore.
The central bank will require reserves to be set aside for purchases of all currency derivatives from October, according to a document seen by Reuters, making it more expensive to bet on further depreciation of the yuan.
The reserve requirement is aimed at “fending off macro-financial risks”, the PBOC notice said. The yuan, which fell 2.6% in August in the biggest monthly decline since 1994, rose 0.1% to 6.3698 a dollar in Shanghai.
The onshore spot rate, which can trade a maximum 2 percent on either side of the PBOC’s daily fixing, has advanced 0.75 percent in the past five days.
The true characterisation of an worldwide reserve currency is earned when investors feel safe in putting their wealth in it, especially during global volatility. Meng Qingfeng, vice minister of public security, said late in August that those money-transfer agents remained “rampant” despite repeated crackdowns on them, according to the official Xinhua News Agency.
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The People’s Bank of China said in a brief statement on its website that the credits have a maturity of six months with an interest rate of 3.35%, and that the funds went to 14 financial institutions.
