Currency News: A Shift Towards A Free-Floating Yuan ?

Currency News

Free-Floating Chinese Yuan May Upset Current Financial Markets

For the Pacific Investment Management Company known as PIMCO, it’s likely that the Yuan will be in the near future a free-floating currency only driven by market forces. The Yuan is currently strictly controlled by the Chinese government to no more than 2 percent from the Central Bank daily fixing. This enable them to ensure their economic stability but also has an impact on the rest of the markets. In contrary to what is generally said, most of the other countries are pleased with the current situation.

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A free-floating Yuan would create panic among the global markets as it did in 2015 when a devaluation move was provoked by the Chinese government (Bloomberg). The Yuan dropped 1.8 percent and resulted in other currencies fall: at least 1 percent for South Korea, Singapore and Australia. This indicated a change in China’s priorities with a focus on fighting the deepest economic slowdown the country had to deal with since 1990.

Even though the nation’s reserve accumulated to the trade surplus make the option of a sharp fall of the Yuan harshly possible, the liberalization of the exchange rate will lead to the depreciation of the Yuan. On Thursday, the Yuan reached a record low with 1.9 percent to 6.8588 per dollar. And this is not in the interests of the US government that plan to increase its borrowing costs this year.

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However, in order to make of the Yuan an international currency, the Chinese government could drop ballast regarding the control of the currency. This would resolve the trade off that was created by the current situation with an “impossible trinity” between managing the exchange rate, deterring the capital outflows and adjusting domestic borrowing costs to the domestic economy.

For Zhu Baoliang, Chief Economist at State Information Center: “Allowing Yuan depreciation can reduce domestic risks and interrupt the transmission of global risks.” Despite the impacts on the global markets, Yuan’s unshackling seems necessary for China.

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