Chinese Central Bank Confident It Can Maintain Currency Stability

Chinese Yuan
Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing, China (Photo: Reuters / Kim Kyung-Hoon)

As the Chinese Yuan, or Renminbi, dropped to its lowest level in over a decade, global markets have raised concerns over whether or not China would be able to maintain its currency's stability. The People's Bank of China (PBOC), the country's central bank, issued a statement on Monday aimed at reassuring the markets that it will be able to maintain the currency at a stable equilibrium.

The drop of the Yuan to 7 against the US dollar has caused concerns of a possible currency war against the United States. China likely devalued the currency in an attempt to cushion the effects of the Trump Administration's imposed tariff hikes on Chinese goods.

However, the decision could have unforeseen consequences that may include an all-out currency war resulting in the further decline of the global economy.

On Monday, the onshore exchange rate of the Yuan, which typically trades 2 percent higher or lower on a daily central parity rate, dropped by 1.3 percent to 7.0297 per US dollar. This was the first time that the currency crossed the 7 point mark since the global financial crisis in 2008.

To quell concerns regarding the instability of the currency, the PBOC issued a statement on its website explaining the various elements that led to the devaluation of the Yuan. According to the Chinese central bank, the drop in the Yuan against the US dollar was mainly due to the influence of "unilateralism and protectionists measures."

The drop is also apparently a direct result of expected tariff hikes on Chinese exports that will likely be imposed by the United States in the coming months.

The PBOC further explains that the drop was a "normal" reaction to the market's supply and demand relationship and the ongoing fluctuations within the global exchange rate markets.

The PBOC assured the public by stating that the Yuan still continues to be stable and strong against other currencies.

The central bank stated that long-term sentiment for the currency remains to be positive given the country's current economic fundamentals.

However, the PBOC warned that the US dollar's value and the current supply and demand situation will still have a great impact on the short-term value of the Yuan.

The PBOC outlined its plan of action to further ensure a reasonably stable equilibrium of currency. The measures include a heavy crackdown on illegal short-term speculative trading in the foreign exchange markets and the implementation of enhanced exchange rate management programs aimed at stabilizing market expectations.

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