What The Heck's Going On With The New Global Reserve Currency, The Chinese Yuan?

Wolf Richter profile picture
Wolf Richter

A "structural change": capital flight in yuan.

The Chinese yuan fell to 6.722 to the US dollar currently, the weakest since September 2010. It's down 3.3% so far this year. OK, a squiggle compared to the wholesale drubbing the UK pound has been taking since the Brexit vote, but there's a difference: the yuan gets managed with an iron fist.

Some folks interpret this to mean that the People's Bank of China has been weakening the yuan to gain some trade advantages and revive the export boom and kick economic growth back into gear. But evidence is piling up that the PBOC instead has been trying to slow down the yuan's descent.

And this happened just days after the yuan joined the IMF's special drawing rights (SDR) basket of reserve currencies, a huge milestone for the Chinese government that has been laboring on the internationalization of the yuan for years, mostly in tiny baby steps.

But the yuan is up against the mega-problems in China's debt-plagued economy, and it's pressured down by enormous and, it turns out, not officially disclosed capital outflows.

"If that trend persists, expect further yuan weakness versus the greenback," wrote Krishen Rangasamy, Senior Economist Economics and Strategy at the National Bank of Canada.

While a weaker yuan would be positive for exporters, it leaves many Chinese companies in an increasingly precarious situation: they have issued over $1 trillion in dollar-denominated debt, according to the Bank of International Settlements. And that dollar debt becomes increasingly difficult to service with a shrinking yuan.

This chart from NBF Economics and Strategy, shows foreign-exchange reserves (blue line, left scale, in $ trillions) edging down to $3.185 trillion in August, the lowest since 2011. Note how the decline started in mid-2014, and how so far this year, reserves have remained relatively stable, with a slight downward slope.

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Wolf Richter profile picture
Wolf Richter is the publisher of wolfstreet.com, a site focused on business, finance, and money. The site is free. In addition to the many years at wolfstreet.com and its predecessor site, he has 20 years of C-level operations and finance experience.

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