Friday last week and Monday this week saw turmoil in global markets, primarily off the back of negative economic data from China. With the recent changes in how the exchange rate of the yuan is managed, the yuan’s value crashed. In Hong Kong last week its value dropped by as much as 2.7%, much more than the guided 1.1% the PBOC managed onshore. To help assuage the difference and reduce the fall, the PBOC intervened in the markets and acquired yuan, as reported in today’s US print edition of the Wall Street Journal’s article, Beijing Steps In to Prop Up the Yuan. In so doing the PBOC has probably spent another small fortune from its exchange reserves.
Those reserves have already been reduced in the last year as China does its best to manage its currency’s fall more carefully than would otherwise happen in a free and open currency market. It was recently reported that it’s reserves fell by $93m. It is thought that the total reserve is now closer to $3.5tn, and that this has fallen from about $4tn. However, with each and every intervention this reserve continues to decline. This is good practice for sure and very common in the currency markets. But how long can this go on? Central banks will forecast long term trends and will try to determine when and if such intervention should slow down. Too many politicians have fallen on their own currency sword when they try to ‘buck the market’. Such behavior only works well for a while. If the fall of the yuan is going to persist, intervention can only help so far.