PBOC Governor Zhou Trying to Prevent Currency Depreciation by Buying Yuan, Action May Dry Up Liquidity

Published By : 01 Sep 2015 | Published By : QYRESEARCH

To restrict the rapid depreciation of yuan, Zhou Xiaochuan, the governor of People’s Bank of China, is intervening to buy yuan and sell dollars. The need to intervene in the foreign-exchange market is drying up liquidity in the banking system of the country. Last week, the central bank in China reduced the percentage of deposits banks need to keep and also lowered the benchmark interest rates. The PBOC is ensuring that there is enough cash in the banks to boost lending amid the slowing economy in China. However, Zhou’s worries are far from getting over.

As Yu Yongding, a former academic member of the bank’s monetary policy committee, states that if the central bank does not want the yuan to depreciate, it needs to sell foreign exchange to support the exchange rate of yuan. Investors are getting worried that how much of the foreign exchange reserves will be spent by the central bank to support the yuan exchange rate. Yu further points out that to offset the loss of liquidity, central banks elsewhere would be compelled to chalk out an easier monetary policy than previously anticipated. This can lead to the Federal Reserve delaying a rise in interest rates or the central banks in euro region or Japan buying more bonds. 

In his 13 years tenure as the governor of PBOC, Zhou has experienced multiple face-offs with markets. In July 2005, when he revalued the currency, money inflow increased betting on a stronger currency. He witnessed a modest but steady currency appreciation by buying dollars and selling yuan. However, things are not so easier this time. The value of yuan at the central bank and other financial institutions dropped significantly in July. Analysts have pointed out that if the central bank is able to plan continuous easing of monetary policy, it will boost the confidence of the overall economy in China.  
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