RMB Interventions Paving Way for Reforms

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RMB Interventions Paving Way for Reforms
Will China shock yuan devaluation and stock market trouble force the Fed to delay its rate hike? via Investing.com

By Dan Steinbock
Recently, Chinese renminbi has depreciated substantially. In the short-term, interventions will prevail; in the longer-term, the currency will stabilize.
In the past quarter, Chinese renminbi (RMB) decreased by 4%, which is significantly faster than anticipated, due to rising tensions in foreign-exchange markets over China’s rising debt and bubbling property markets. China has managed to stabilize growth, but not without capital controls, hefty lending and decisive interventions.
Recently, the RMB soared against the US dollar. By encouraging Chinese banks to withhold funds from other banks, the People’s Bank of China (PBoC) tightened liquidity in Hong Kong, which led the overnight lending market to surge from 17% to 61% in 2 days – which, in turn, caused the RMB to soar in offshore market.
Due to efforts to stabilize the currency, China’s foreign-exchange reserves fell to $3 trillion last month; the lowest since spring 2011. In the past 17 months, PBOC actions have penalized the reserves by $1 trillion.

The Trump-Fed challenge
Three years ago, the RMB was still close to 6.00 per US dollar. As Chinese growth decelerated, debt-taking continued and the Fed’s rate hikes began, RMB weakened to 6.95 in 2016. As it recently got close to 7.00 per dollar, the PBOC moved to support the currency.
As Chinese companies and investors have tried to reduce their RMB stakes and diversify risk, the exchange rate has faced further pressure, which has led authorities to ratchet up controls on Chinese companies and investors investing offshore. Thanks to these measures, China’s growth has been stabilizing, but at cost.
During the global financial crisis, China’s huge stimulus package boosted confidence, supported the infrastructure drive, and prevented global depression. But excessive liquidity led to speculation in equity and property markets. The current credit target of 13% remains twice the growth rate. China can no longer rely on credit-fueled growth.
Now Beijing must manage its rebalancing, while deleveraging huge local debt. In practice, that means balancing between RMB depreciation and actions to defend the currency. After January 20, Beijing must also respond to a dual challenge of escalating trade friction with the Trump administra