Ns3040 summer term 2014 chinese currency movements february march 2014
This presentation is the property of its rightful owner.
Sponsored Links
1 / 7

NS3040 Summer Term 2014 Chinese Currency Movements: February/March 2014 PowerPoint PPT Presentation


  • 86 Views
  • Uploaded on
  • Presentation posted in: General

NS3040 Summer Term 2014 Chinese Currency Movements: February/March 2014. Chinese Currency Movements I. Late February 2014 China’s yuan fell steadily against the U.S. dollar Appears the Chinese central bank deliberately pushing the currency lower Why the sudden devaluation?

Download Presentation

NS3040 Summer Term 2014 Chinese Currency Movements: February/March 2014

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Ns3040 summer term 2014 chinese currency movements february march 2014

NS3040 Summer Term 2014Chinese Currency Movements: February/March 2014


Chinese currency movements i

Chinese Currency Movements I

  • Late February 2014 China’s yuan fell steadily against the U.S. dollar

  • Appears the Chinese central bank deliberately pushing the currency lower

  • Why the sudden devaluation?

  • Currently yuan trades within a tight range set by the central bank every day

  • Short-term traders and increasing demand almost constantly pushing currency higher within that range

  • By devaluating the currency’s value the central bank is trying to discourage (one way) speculation on the currency

  • With fewer speculators trading in the yuan China hopes to have an easier path to widen the yuan’s trading range further

  • In longer term make the yuan a free-floating currency


Chinese currency movements ii

Chinese Currency Movements II


Chinese currency movements iii

Chinese Currency Movements III

  • Why does China want to free its currency in the long term?

    • Having a freely traded currency makes it easier for the yuan to become more prominent in trade and payments internationally

    • A freely convertible currency also makes the yuan a more attractive reserve currency for Central Banks

  • Other reasons –

    • China is trying to push its economy away from relying so much on exports and investment

    • Instead it wants more of its growth to come from domestic demand

    • Making the yuan behave more like a market driven currency fits into this broader plan.


Chinese currency movements iv

Chinese Currency Movements IV

  • More conjectural reason:

  • Concerns over shadow banking operations

    • Since December 2012 the People’s Bank of China (PBoC) has tried to limit activities in the shadow banking sector

    • Aim is to prevent high-interest loans from triggering a wave of defaults among local government borrowers

  • Such efforts have not been effective

    • Entrusted loans rose to $64.7 billion in January 2014 almost double that in January 2013

    • Avoiding the central bank’s pressure to liquidate shadow financial assets (which offer attractive returns) banks are opting to sell off lower yielding enterprise bonds (debt issued by state-owned companies)

  • Result – cost of financing to companies and local governments.


Chinese currency movements v

Chinese Currency Movements V

  • These actions squeeze the supply of credit to the “real” economy while shadow finance segment is nourished by inflows of capital that slip through holes in the country’s capital account

  • Steps in the yuan carry-trade

    • Borrow abroad at around 1.0% interest

    • Change money into yuan and bring it to mainland

    • There receive 10 to 12% by lending it to a trust or

    • 20% by putting it with an underground bank

    • On top of that capered the expected yuan appreciation

  • Evidence

    • Signs of over-invoicing of exports

    • 44% in survey felt that fake invoicing was on the increase


Chinese currency movements vi

Chinese Currency Movements VI

Summing up

  • PBoC wants to stifle one way bets on yuan

  • If successful will slow speculative activity and with it destabilizing capital inflows.

  • Bank knows that if it were to try to stop inflow of illegal capital entirely it might trigger a wave of financial defaults it has been trying to avoid in the first place

  • Gradual approach using exchange rate flexibility to generate a market response seems to suit Bank’s objectives for now


  • Login