China indicates change in its long-standing yuan policy

Economy - Mohit Shah - Mar 06,2017

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china indicates change in its long standing yuan policy

China has signaled it may alter its course centered at exchange rates due to pressure from the rising US Federal Reserve rate and threats from Donald Trump regarding a trade war.

Chinese Premier Li Keqiang stated that the renminbi exchange rate would be further liberalized, and the stable standing of the currency will be maintained in the global monetary system.

It was for the first time that in an annual government report the central government included the condition to ensure the stable global position of the yuan as one of its foremost tasks.

According to analysts, the yuan is losing its appeal in the eyes of the investors. Even though it has acquired a nominal reserve currency status from the International Monetary Fund, the downfall for the Chinese currency is primarily due to the tightened capital account controls placed by the government.

Shen Jianguang, chief economist for Mizuho Securities Asia said, the capital controls will surely hurt the “yuan's status and reputation”. He also pointed out that in the past two years, the position of the yuan as an international settlement as well as valuation currency has fallen.

The efforts by the Chinese government to make yuan an international currency were shattered significantly in the previous year. The yuan deposits in the primary offshore yuan market in Hong Kong were reported to be 46 percent less by the end of 2016.

Moreover, it was also found out that the value of international payments in yuan dipped 29.5 percent in 2016.

It is also noted that, a group of domestic government researchers, with the presence of former central bank adviser Yu Yongding, have been active in calling the government in public to transform the course of the yuan policy for allowing yuan depreciation when the market demands the yuan to go weak.

Christopher Balding, professor at Peking University HSBC Business School in Shenzhen said, there are heavy threats that the US dollar is expected surge following the rising US Federal Reserve rate which would put heavy pressure on the Chinese currency throughout 2017.