PRC Goes From Devaluing to Defending Yuan

♠ Posted by Emmanuel in , at 1/28/2015 01:30:00 AM
Pile 'em high, but don't sell 'em cheap: the yuan circa 2015.
China amassing $4 trillion in foreign exchange reserves by 2014 is an astounding if somewhat mindless feat. Everyone thought that a developing country amassing $1 trillion in reserves was mad; what more four times that amount? It's not because the dollar is tanking at the moment--quite the opposite.  Rather, all that money cannot be spent on things that can spur Chinese development like health and education. After all, they are foreign reserves whose previous purpose was to keep the yuan weaker than economic fundamentals would apply to help Chinese export competitiveness.

Apparently, with dollar strength causing turmoil in global markets, China is hardly immune. The fear in China is not that it will become the next Brazil or Russia hemorrhaging reserves since it is not quite in as bad a shape. Rather, it is the possibility of a disorderly outflow induced by dollar strength--investors dumping the yuan all of a sudden--that is causing a unique trend after all these years. Instead of keeping the yuan down, Chinese monetary policymakers now appear to have instituted measures to keep the yuan up:
After more than a decade of curbing the currency’s gains to help turn the nation into a manufacturing colossus, there are signs the People’s Bank of China is now propping up the yuan to stem an exodus of capital that’s threatening the economy

A gauge of capital flows on the PBOC’s balance sheet fell by the most since 2003 last month in a sign it’s selling foreign currency, while the yuan’s reference rate set daily by policy makers is at its strongest-ever level compared with the market price. Chinese Premier Li Keqiang said today the nation would implement measures to manage the economy more effectively and boost competition...

China amassed a world-leading $4 trillion of foreign-exchange reserves by mid-2014 as exports surged and capital flowed in, attracted by a currency that strengthened for four consecutive years. Now that the yuan’s gains are faltering, the PBOC is trying to prevent its declines from turning into a rout that could deter investment just as the economy suffers its slowest growth in 24 years.  
What's more, China may be attempting to move the yuan from being synonymous with "beggar-thy-neighbor" to the proverbial "store of value" by making it keep its value, or at least not depreciate over time. Speculation is that the Chinese are now keener on maintaining the yuan's value so more countries would be willing to hold it:
A stronger exchange rate would also boost the yuan’s prestige as China seeks to promote it as a currency of global commerce. In the past 12 months, the Asian nation has appointed yuan-clearing banks in cities from London and Frankfurt to Singapore.

An appreciating currency may also reassure U.S. officials who have accused the PBOC of debasing the yuan for economic advantage. “If there are signs of significant depreciation pressure, the PBOC will intervene,” Kewei Yang, the head of Asia-Pacific rates strategy at Morgan Stanley in Hong Kong, said by phone on Jan. 16. “The risk of capital outflows weighs more in importance than temporary support for exports from a weak currency.” 
Welcome to the new world economy.