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Yuan’s decline

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THREE hundred and twenty billion dollars. That is the amount by which China’s gargantuan foreign exchange reserves declined by in 2016, according to the latest data that has been made available by the People’s Bank of China. Chinese reserves, which peaked at $4 trillion in mid-2014, have fallen to $3.011tr, their lowest level since March 2011. The steep decline in reserves and a weakening yuan could create significant global economic headwinds.

Markets function as a herd. Euphoria can quickly give way to panic, and people’s perceptions can lead them to take actions that create facts in line with their perceptions. The present perception is that the yuan is overvalued and that China’s central bank will continue to intervene in the market to manage the currency’s decline.

The decline in the yuan began in August 2015 when the Chinese authorities made a surprise move, allowing the currency to depreciate by almost two per cent against the US dollar. This decision was made in a bid to deflate the currency after a steady appreciation in its value. The Chinese central bank has since taken a whole host of measures to manage the fall in the value of the yuan. These include directing state-owned banks to restrict lending in yuan to other banks,........

© Dawn