China’s Central Bank suggested in an editorial on Friday that it may be time to de-peg the yuan from the dollar, and instead peg it to a basket of currencies, The Wall Street Journal reports.
The posting, published in Chinese state media outlet The People’s Daily, gave no details on what that basket would include, or when these moves could be made.
However, Chinese officials are about to attend their annual Central Economic Work Conference, so you can imagine they will be talking about it there.
Now is definitely the time to talk yuan. This week it fell to its lowest level against the dollar in four years.
Consider this de-pegging announcement a way for the Chinese government to manage two conflicting goals for its currency — its desire that the yuan be set by market forces and that it also be stable.
Those are two conditions that the yuan had to meet when it was accepted into an elite club of currencies designated as global reserve currencies by the World Bank at the end of last month. To make the cut a currency has to be widely used and fairly stable.
China doesn’t want to cause instability by devaluing the yuan, so it has to figure out how to help the market gently guide the yuan down to its true value. Of course, the market isn’t known for being gentle.
The things you do to get in the club …
The real drama with the yuan started in August when the government announced that China’s July exports fell 9%. At the same time, economists noticed that the ratio of job offers to job seekers was starting to decline. A few days later, the government devalued the yuan by 2% in an effort to stimulate the economy, which has slowed down dramatically over the last year.
Remember, though, that at the same time China was also still trying to get into to this elite club — the Special Drawing Rights (SDR) basket of currencies. To get in, it had to keep the yuan stable. So the government started to spend billions in reserves to do just that — to keep the yuan from depreciating further.
For a few months that seemed to be working. Analysts voiced concerns that China may spend too much of its cash trying to prop up the yuan, but a lot of those fears were assuaged in October, when currency reserves rose by $11 billion.
On Monday however China revealed that its reserves declined by $87 billion in the month of November. After October’s print that came as a shock to some, and over the week the market sent the yuan to its lowest level in four years.
Part of the reason for that, The Wall Street Journal pointed out, is that China reduced some of its currency controls in order to get into the SDR club. That made it easier for Chinese people, especially the super rich sitting on a lot of cash, to change their yuan to dollars.
China can’t prop up the yuan forever. It has an economy to fix, and a weaker currency may help a bit with that by spurring exports.
If it de-pegs the yuan from the dollar it could potentially weaken the yuan without causing a huge disturbance in the market.
Emphasis on “could.”
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