Feds Rate Increase Ratchets Up Pressure on Chinas Yuan
Source: Wall Street Journal
BEIJING—A more hawkish U.S. Federal Reserve is presenting China’s central bank an urgent task: How to stabilize expectations for the yuan?
“The most pressing demand of the day is to break the renminbi’s one-way depreciation expectations,” Sheng Songcheng, a senior adviser at the People’s Bank of China, said in an interview.
Renminbi, or the people’s currency, is another name for the yuan. Mr. Sheng suggested that the central bank dig further into its foreign-exchange reserves to help defend the yuan and “maintain market confidence.”
As the dollar surged after the Fed’s decision to raise interest rates, the yuan tumbled to the lowest level against the greenback in more than eight years Thursday, extending a rapid decline in recent weeks and bringing its loss to about 4% since the beginning of October. As of 4:30 p.m. Beijing time, one dollar buys 6.9354 yuan. The Chinese currency is now down 6.7% against the dollar this year.
Read more: http://www.wsj.com/articles/feds-rate-increase-ratchets-up-pressure-on-chinas-yuan-1481817536
Here is a classic of example of Trump's misleading rhetoric. When Trump complains that China is manipulating its currency, most people think that China is making is currency cheaper. It isn't. It used to, but not now. Rather, it has been trying to keep investors from fleeing China's slowing economy by making its currency stronger. However, the Fed's increase in interest rates makes this tougher.
https://www.washingtonpost.com/news/fact-checker/wp/2016/12/15/trumps-outdated-claims-that-china-is-devaluating-its-currency/?utm_term=.2fbbdf24da59
Trump’s outdated claims that China is devaluing its currency
From the 1990s into the 2000s, China artificially kept the value of the yuan, or renminbi, low. It kept the Chinese currency cheaper, undervalued and more competitive compared with the overvalued and less competitive U.S. dollar. This currency devaluation distorted China’s economy and made it seem stronger than it really was. China’s currency devaluation led to tensions among world leaders for many years.
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However, the situation has changed dramatically over the past two years, Bergsten said. China’s economic growth has slowed down, and the yuan is depreciating. There’s more anxiety about the future of the Chinese economy, and the Chinese are sending private capital out of the country to find safer investments in other countries, Bergsten said.
So, instead of holding the value of its currency down, China is now selling dollars to prevent the yuan from weakening more than it has. From August 2015 through August 2016, China has sold more than $570 billion in foreign currency to prevent more rapid depreciation of its currency, according to estimates by the Treasury Department.
“They’re actually doing the reverse of what he [Trump] says, helping our competitiveness by keeping their currency from weakening much further,” Bergsten said.
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