Chinese yuan falls to 14-year low: How does it affect central bank reserves

Chinese yuan falls to 14-year low: How does it affect central bank reserves

Domestically, the Argentine Central Bank has reserves of $19.5 billion in yuan for which it pays China’s shibur rate plus 3 points. For every point the yen falls, reserves fall by $195 million. Even before payments to the IMF, the yuan represented 52% of reserves, but that proportion has now risen to 54%.

The yuan fell to 7.2301 per dollar, its lowest level since January 2008. One yuan was worth about 13.8 cents, down 15% from its March peak this year.

On Wednesday, the central bank’s deputy governor, Liu Guoqiang, held a video conference with Chinese bankers and asked them to “maintain the stability of the underlying exchange rate,” according to a central bank statement. He said Liu warned bankers not to bet on the rise or fall of the yuan.

“Maintaining stability is the top priority,” the statement said.

The yuan has exceeded expectations that it could fall as low as 7 against the dollar after the Federal Reserve began aggressively raising interest rates to cool inflation at four-decade highs. The Fed has raised interest rates five times this year and says more increases are possible.

exactly the contrary, The People’s Bank of China cut interest rates to boost growth that fell to 2.2% from a year earlier in the first six months of 2022, less than half the official target of 5.5%.

The yuan is allowed to fluctuate up or down 2% of its initial price daily in tightly controlled operations. This avoids big daily swings, but low days can add up to big swings over time.

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To support the exchange rate, Beijing reduced the amount of foreign currency deposits that Chinese banks must hold as reserves from 8% to 6% as of September 15. This increases the amount of dollars and other foreign currencies available to purchase the yuan. Which would raise the exchange rate.

even so, The Fed cut is not likely to stem this slide which is fueled by a “strong US dollar and further increases from the Fed are expected”.ING’s Iris Pang said in a report.

Pang wrote that โ€œtalking about less aggressive rate hikesโ€ could help the yuan recover, but could weaken further โ€œif the Fed maintains its very aggressive toneโ€ over the next year. Chinese officials previously vowed to avoid “competitive currency devaluation” to gain an advantage in trade.

The yuan sank in 2019 during trade tensions with then-President Donald Trump. This sparked suggestions that Beijing was trying to reduce the impact of increased US tariffs, but there was no official confirmation. Later, the currency strengthened.

Other governments are also struggling to manage capital inflows under pressure from raising federal rates. On Friday, Vietnam’s central bank raised a key interest rate in what economists said appeared to be an attempt to stem the flow of money in search of higher returns.

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