Interventions paving way for yuan reforms

The yuan has depreciated in recent times. In the short term, interventions will prevail, but in the longer term, the Chinese currency will stabilize. In the last quarter of 2016, the yuan declined 4 percent, significantly faster than anticipated, because of rising tensions in foreign exchange markets over China’s rising debt and bubbling property market .

China has managed to stabilize growth, but not without capital controls, hefty lending and interventions.

Only days ago, the yuan soared against the US dollar. By encouraging Chinese banks to withhold funds from other banks, the People’s Bank of China might have tightened liquidity in Hong Kong, which led the overnight lending market to surge from 17 percent to 61 percent in two days, which in turn caused the yuan to soar in the offshore market.

Nevertheless the efforts to stabilize the currency, China’s foreign exchange reserves fell to $3 trillion last month; the lowest since spring 2011.

Three years ago, the yuan was still close to 6.00 per dollar. As China’s economic growth decelerated, debt taking continued and the US Federal Reserve began rate hikes, the yuan weakened to 6.95 per dollar in 2016. As it recently got close to 7.00 per dollar, the central bank moved to support the currency.

As Chinese companies and investors have tried to reduce their yuan stakes and diversify risk, the exchange rate has faced further pressure, prompting the authorities to tighten controls on Chinese companies and investors investing offshore. Thanks to these measures, China’s growth has been stabilizing, but at a cost.

Reforms are necessary to achieve China’s rebalancing ... The real question is the timing of the reform implementation.