Selling foreign currency assets is a way for China’s central bank to boost the value of its currency (or prevent a depreciation) at a time when there is downward pressure on the currency. China’s holdings of US Treasury securities peaked in 2014 and has been declining ever since.Finally, a cheap currency is inimical to the prestige that accompanies a strong and stable currency. Second, a lower-valued renminbi boosts the competitiveness of exports, potentially inviting protectionist actions by China’s trading partners. First, a lower-valued renminbi increases the domestic cost of servicing foreign currency debt. Rather, concern about depreciation stems from three things. Yet China does not have an inflation problem. Why worry about currency depreciation? Countries sometimes worry about depreciation because it leads to higher import costs, thereby fueling inflation. Doing so reduces the PBOC’s balance sheet, which is equivalent to a tightening of monetary policy. This has entailed the sale of foreign currency reserves. China manages the exchange rate, intervening in currency markets to prevent rapid depreciation. The problem with too much easing is that it boosts the gap between Chinese and US interest rates, thereby fueling outflows of capital and putting downward pressure on the value of the currency. The main question is how accommodative monetary policy ought to be.Īlthough China’s central bank, the People’s Bank of China (PBOC), has eased monetary policy in the past year, it has taken a cautious approach. As such, there is no current need for tight monetary policy. Rather, the primary focus of monetary policy is to restore economic vitality. Unlike the world’s other major economies, China is not struggling to contain inflation. It can also be seen as the result of excess capacity. Very low or negative inflation is seen as an indication of weak demand. Inflation data is often considered a signal about the strength of China’s economic recovery. However, underlying inflation is still extremely low. This suggests that the underlying situation is not deflation. When both food and energy prices are excluded, core prices were up 0.6% from a year earlier. When food prices are excluded, the CPI was up 0.7% in October versus a year earlier. This was the biggest drop in food prices in 25 months. Food prices fell 4% in October versus a year earlier, led by a 30.1% decline in the price of pork. The decline in prices, meanwhile, is largely attributable to food. These facts have created some concerns that China is entering a new era of deflation, similar to what Japan experienced in the 1990s. It is also the sixth time in the last nine months that prices have fallen from the previous month. This was the second time in the last four months that prices fell from a year earlier. The consumer price index (CPI) fell 0.2% from a year earlier and 0.1% from the previous month. China experienced deflation in October.The latest on China: Inflation, reserves, foreign direct investment, and trade
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