FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 27 November 2015

How Yuan Devaluations Could Hurt China's Reserve Currency Aspirations

Written by

It is no secret that China has recently suffered a heavy economic downturn in recent weeks. Their stock market has gone from 5166 on 6/6/15 to 3436 on 11/27/15. While the Shanghai Composite has increased YTD, and is up from 2682 since this time last year, the past 4 months have seen massive decreases in stock prices. This has led the government to take on policies to attempt to prop up the Yuan against other currencies following 2 recent devaluations, one on August 11th and another on August 25th.

This will most likely cause more capital to flow out of China as investors look for more secure areas. Much of this will depend on how the US dollar does in coming months as the dollar appears stronger compared to the Yuan. Along with the Yuan depreciating we are seeing capital outflows reach record levels such as in August ($93.9 billion). This continued into September, where investors pulled another $194 billion from the country. As of November 1st, the total outflows from the country for the entire year have totaled $669 billion, which would be more concerning if China did not have their $3.5 trillion in foreign exchange reserves to uphold their currency.

A secondary issue arises strictly within the US, where 40% of foreign exchange reserves are held as US government treasuries. If China is suddenly forced to sell this could cause a price drop in the treasuries and a rise in yield. The Chinese prime minister has claimed that the yuan will not be devalued again to boost investment as he does not want to create a currency war.

China has also been hoping to become a global reserve currency, recognized by the IMF, as of recently. Many have become worried about this status recently as the Yuan has been unstable and there has been a lack of communication about reforms, though support from the US has helped their case. China’s president Xi Jinping has also claimed that there is no basis for a long-run devaluation of the Yuan as it should stabilize and gains strength again later on.

Other countries to hold this status are the US, UK, Japan, Switzerland, and those who trade with the Euro. The biggest advantage of having this status is the ability to import cheaper as there is no need to exchange currencies. The main criteria the IMF uses to judge whether a country is worthy of reserve status is its currency’s ability to trade freely as well as its impact and volume on the global market.

While there is no doubt China is a large player in the global economy, the renminbi may not be as freely usable as the IMF would like. Much of this concerns lies with capital controls, the lack of transparency by its central bank, and worries of liquidity in times of need. If China is to win this status they will have to wait some time as the IMF has delayed their case due to the Yuan devaluation earlier this year. Russia has decided recently that they will hold the Yuan as a reserve currency, and plans to buy around $1 billion in bonds issued from China, which further strengthens their case.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

Econintersect Contributors


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Slow Economic Growth Will Be Around For A Long Time
The Job Guarantee, Wage-Price Inflation And Alternative Solutions: Part 2
News Blog
Early Headlines: Asia Stocks And Dollar Up, Oil, Gold Steady, Obama Climate Policies Gone, US Oil Glut, Euro Surges, Shorts Remain, Trump Into Yemen?, Iran-Russia Deals, Cat 4 Cyclone Hits Oz, And More
March 27, 2017 Weather and Climate Report - Will the MJO Deliver a Nino?
The Most Reputable Companies Worldwide
Gut Bacteria Play A Role In Long-term Weight Gain
What We Read Today 27 March 2017 - Special Public Edition
Is Less More In The Smartphone Market
Average Gasoline Prices for Week Ending 27 March 2017 Statistically Unchanged - Again
What We Read Today 27 March 2017
Why New Jets Could Destroy Airlines
March 2017 Texas Manufacturing Survey Continues to Expand
Wage Growth After The Great Recession
Is OPEC Losing Its Ability To Influence Oil Prices?
Many Worry That The Great Recession And Mounting Student Debt Have Stunted Millennials' Financial Development
Investing Blog
The Dollar's Coming Impact On Markets
The Real 401k Plan Manager 27 March 2017
Opinion Blog
Macron May Lead But Le Pen Remains The Big Story
Is The 20th Century Still The 'Hayek Century'?
Precious Metals Blog
These Gold Stocks Will Produce Much Bigger Gains Than Gold Itself
Live Markets
27Mar2017 Market Close: US Dollar Falls Into The 98 Range, WTI Crude Slips Into The 47 Handle, Wall Street Generally Sour And Down
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved