China Approaching the Limits of Currency Management

The People’s Bank of China has historically exercised great control over domestic Renminbi valuation, but the traditional tools used for currency management are beginning to come under stress.
This monetary strain will be exacerbated by activities in the United States including an expected rise in interest rates and an aggressive stance against China by the incoming Trump administration. These factors pose significant challenges to China’s long-term growth targets even as Beijing carefully manages the Yuan’s devaluation.
Internal Challenges
China has historically been dependent upon a handful of levers for currency management, and Beijing’s favored lever of control fluctuates as time passes. One of these tools, China’s foreign exchange reserves, has realized rapid depletion from significant use in recent years. In December, reserves fell by $41 billion to $3.01 trillion. While still at a safe level, it is unlikely that Beijing can dip well below the current reserve without realizing increased currency and market volatility. The selling of its reserve of US dollars has been the tool of choice to slow the rate of Yuan depreciation, but further depletion of China’s foreign exchange reserves will have to slow in 2017.

This post was published at FinancialSense on 01/23/2017.