One side effect of trying to boost a nation’s economy is currency depreciation. However, in China they must do so without allowing the yuan’s value on the foreign exchange market to change. Especially after exports unexpectedly fell 3.3 percent in January, China cannot afford to allow its currency to appreciate. This would have two negative effects on the economy. First, it would diminish the effect of China’s stimulus, which would be troublesome for leaders attempting to counter the lowest GDP growth rate in 24 years. Second, it would make exports less competitive on the global market, which would also diminish growth in 2015 by further decreasing net exports.
On the other hand, depreciation of the yuan will also be problematic. The Bank for International Settlements, is owed $1.1 trillion by various Chinese companies. This means that any decrease in the value of the yuan will make it harder for these loans to be paid back, putting additional stress on companies amid an economic slowdown. In addition, depreciation would devalue loan payments by countries such as the US whose debt is owned mostly by China.
In order to walk this “tightrope” the PBoC has a few tools at its disposal. To help the economy, it recently cut interest rates and reduced the amount that banks need to keep in their reserves for the first time in two years. If these inflationary policies have their intended effects and depreciate the yuan as a result, the PBoC also has $3.8 trillion worth of foreign currency reserves to counter any such change in the yuan. In sum, China faces a distinct challenge not faced by other nations by attempting to increase the rate of GDP growth without affecting its currency’s value relative to the dollar.