China?s Trillion-Dollar Yuan Defense Puts Growth at Risk
Posted by Winnie Melda on February 21st, 2019
The article on the growth risk that has been influenced by the trillion dollar defense of the Yuan that China has been employing to ensure the Yuan remains stable has produced some interesting insights. The desire to keep the strength of the Chinese economy stable and continuing to grow is pegged on the ability to ensure the Yuan remains constant. Thus the prevailing attribute has been in ensuring that the Yuan does not lose value in comparison to the other major currencies as the US dollar. The assertion is informed by the fact that the Yuan has recently become a global hot button, with the manner in which it has been handling being a concern that is highlighted with the threat by President Donald Trump that China would be labeled a currency manipulator.
There is a prevailing assertion that the focus by the Chinese administration in ensuring that they slow the rate at which the Yuan declines is an issue that is of great significance to the world economy. If the aggressive approach shortchanges that are adopted by the people’s bank of china short change the traditional central banking mandates, the assertion is that it could end up inhibiting the economic growth of China. It follows that the core focus that the bank has had in ensuring that they prop up the Yuan has led to a difficult situation whereby it has inhibited the economic growth of China. The propping up of the Yuan has led to a situation whereby the country’s economy has strained the ability of the peoples’ bank of China to fight the other economic challenges like the persistent housing bubbles.
The emphasis China has putting their currency ahead of the other economic issues has become risky since the country has been pushed to a state whereby it is facing a “trilemma.” The implication of these “trilemma” is the fact that the country has to fight managing its economy on three fronts that include controlling the exchange rate, free flow of capital and independent monetary policy, a situation that no country can manage at once. Overall, for more than two years, the people's Bank of China has been addressing the challenges of a weakening Yuan and consequently spending almost $US 1 trillion in trying to control its rate of weakening.
For the greater part of the past decade, China had appeared to be defying the trilemma effect through the slow lift of its capital controls and managing to keep the Yuan interest rates in control. Through the tightening of the money outflow controls, there has been a weakening of the years that encompassed efforts meant to make it easier for China to invest overseas and additionally make the country more attractive to foreign investors. The PBOC has further complicated the situation for China as it has ignored the traditional monetary policy duties since its decisions are currently associated with the impact on the Yuan, especially when providing funds to banks. Although the tightening could help in prodding some businesses to cut back on the excessive borrowing, it creates unintended stresses as the increased risk of a full-blown cash squeeze in their financial system.
The overall desire by Beijing is in ensuring that the defense of the Yuan is going to reduce the possibilities of the trade war that could compromise their exports and weaken their relationship with the US. It is, however, evident that the immense focus that has been placed on propping the Yuan is having negative impacts on the Chinese economy.
About the AuthorWinnie Melda
Joined: December 7th, 2017
Articles Posted: 364
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