China faces tests in managing yuan as dollar climbs

By Li Hong Source:Global Times Published: 2018/6/6 22:28:40

Illustration: Luo Xuan/GT

Facing a murky outlook when it comes to trade with the US and a possible deceleration of the world's second-biggest economy, China's government, the central monetary authorities in particular, must be on guard against sudden capital outflows and do their best to keep the yuan stable.

In recent weeks, the rapid rise of the US dollar caught markets off guard. Financial crises erupted in some emerging economies such as Argentina and Turkey, where people watched their currencies sink amid capital flight.

In response, central banks in Argentina and Turkey had to raise their benchmark interest rates sharply, which experts said would likely slash their economic growth in the coming years. In previous global financial crises, we saw emerging economies like Thailand, South Korea, Brazil and Mexico come under assault in exactly the same way.

Now, major global economies seem to be on very different trajectories, with the EU and Japan still pursuing quantitative easing to prop up their feeble recoveries. The US has persistently been on the path of monetary deleveraging and raising interest rates since mid-2015.

Buoyed by ever-improving employment data and a strong economy, the US Federal Reserve will almost certainly vote to hike rates again late in June. Market watchers and financial experts predict two more US rate hikes later in 2018, which will further strengthen the US dollar.

The market impact of a rapidly strengthening dollar will have grave implications for economies around the world, including China. The yuan doesn't have a fixed value in relation to the world's major currencies such as the US dollar, euro, yen or pound. Its value fluctuates in response to its economic conditions, government policies, trade balances and other factors.

During the past two months, the depressingly coercive posture of the White House led by US President Donald Trump, who has threatened to impose punitive tariffs on $150 billion worth of Chinese imports, combined with possible hostile moves to curb Chinese investments in the US, has sent a chill through markets. As a result, many sectors are feeling the pinch.

It's not just that Chinese stocks have lost altitude. The yuan has also encountered strong headwinds and is now in the doldrums. The currency has fallen about 2 percent against the US dollar so far this year.  Meanwhile, the US Dollar Index, which values the greenback against a basket of currencies, is up more than 1 percent since January.

Some Chinese analysts have warned that if the central government doesn't pay close attention, the yuan could face major volatility later in the year, which could be detrimental to the nation's economy.

They noted that in the second half of 2015 and first half of 2016, the yuan was down against the US dollar by as much as 11 percent at one point, because of the Federal Reserve Board's move to start raising rates, coupled with a "mysterious big drop" in China's foreign exchange reserves, which caused a panic in the market.

It turned out that a few huge corporations - including Anbang Insurance, Dalian Wanda, HNA Group and Fosun Group - had been on a buying spree of overseas assets. The central government hit the brakes on them in 2017, effectively plugging a loophole through which reserves were leaking. The government later promulgated broader and tougher rules on overseas purchases, and it even took Anbang under State custody.

Experts encourage the government to keep a watchful eye on irregular moves by companies and individuals to shift funds abroad through every possible illegitimate channel, while at the same time fine-tuning policies covering financial market stability. For instance, domestic companies that want to sell short-term bonds overseas should be restricted.

Also, with recent import tariff cuts on cars and many high-end items including clothing, cosmetics and home appliances, China may have a problem maintaining a current-account surplus. Affluent middle-class Chinese households are going to buy more quality foreign products and travel more overseas, posing a serious test to the country's reserves.

The monetary authorities will have to ease capital controls by bringing more overseas investment into China's markets and facilitating the yuan's free convertibility with the world's major hard currencies.

The author is an editor with the Global Times.


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