Renminbi Value in Decline

Published on Author geeker

The Chinese renminbi fell to its lowest level in almost a year on Friday. China’s central bank has been engineering this decrease in value since the new year in an effort to deter and punish speculation and to stop so called “hot-money”, or huge capital flows from entering the country. Analysts estimate around $150 billion in hot money entered the country last year.

According to Wang Tao, the chief economist at UBS, “It’s hard to completely stop hot money from flowing into China. Offshore, the interest rates are low; Chinese interest rates are really high. And if the exchange rate is appreciating, investors view it as a win-win.” The central bank is weary of these huge cash flows because of the potential inflationary effect they may have, which would drastically hinder the Chinese governments efforts to revitalize the economy and fix its banking system. With a meeting of high-level officials set to take place soon,  analysts believe that the government  is set to expand the the currency’s daily trading band, which would allow for greater fluctuations in both the positive and negative directions.

Link:NY Times

5 Responses to Renminbi Value in Decline

  1. It seems ironic that a nation that tries so hard to minimize outside influence and the entrance of foreign competitors into its markets is the nation that everybody wants to enter. Perhaps the old adage about wanting what you can’t have applies, but really it makes sense that a market as large as China would have the rest of the world salivating over the opportunities within it. Even when it takes the direct action of manipulating its currency, China still faces the onslaught of foreign investment and “hot-money.”

  2. Eventually I believe China will further open their doors to outside investment, as they seem to be trending more and more toward complete free markets. In the meantime I don’t believe they are wrong to try and limit this “hot-money” and potential future inflation.

  3. I thought China wanted to slow down its growth. However, how does keeping interest rates low negatively affects an economy or slow the economy down? Or can we take this as a sign that the economy is not under the control of the central government now?

  4. gjeong– I think China does want to slow down its growth a bit, but I also think they’re more concerned with changing their cheap-export driven economy into an economy more focused on domestic consumerism. With their attempts to make the required changes, the Chinese government seems to be worried about the negative effects of inflation caused by the influx of hot-money.

  5. Be economists, please! As long as the yuan was appreciating in a monotonic manner, this provided an automatic capital gain to anyone purchasing yuan – higher interest rates were merely icing on the cake. Of course this mindsight could produce an unreasonably strong yuan in the short term. Allowing the yuan to depreciate is a way to throw ice on such one-way bets.
    But as per a comment on an earlier post, another very large driver is portfolio diversification. Chinese savers hold no foreign assets; we hold many. So an easing of restrictions on fund flows won’t get us to boost our holdings of Chinese assets, whereas there is a huge pent-up demand for dollars in China. In a free(r) market, I would expect the yuan to depreciate – it requires government manipulation to keep it from doing so!