The Chinese central bank’s recent actions alarmed and divided economists and politicians worldwide. During this financial manoeuvre, the People’s Bank of China (PBOC) focused on stabilizing the Yuan. This policy change has generated concerns about China’s economic growth and its impact on traditional central banking duties. This decision concerns the PBOC’s $1 trillion two-year spending to stabilize the currency. However, this approach has generated problems, particularly in the property market, forcing the central bank to be more forceful.
The People’s Bank of China (PBOC) tightened cash outflow controls and raised short-term interest rates after the issues. This method differs from prior foreign investment promotion. These actions aim to stabilize the Yuan and prevent depreciation. The People’s Bank of China (PBOC) faces the “trilemma,” which is its inability to manage the currency rate, allow capital movement, and maintain an autonomous monetary policy. PBOC aims to stabilize the Yuan to reduce negative feedback loop consequences like inflation, unpredictable capital outflows, and difficulty for Chinese enterprises with substantial foreign debt (Shih, 2019).
The PBOC’s measures reduce money flow out of China, changing its money supply. This limit breaks China’s real estate markets’ brief calm, raising property prices. The PBOC’s unwillingness to deploy traditional monetary policy instruments and credit tightening make borrowing money more expensive for banks and private enterprises. This might reduce cash supply and hamper economic growth. The central bank’s recent interest rate decisions resemble those of the U.S. Federal Reserve, indicating that it is no longer working independently.
Although seemingly pleasing, China’s attempt to stabilize its currency, explicitly emphasizing the Yuan, marks a challenging assignment characteristic of significant sacrifice. The People’s Bank of China’s approach to securing the Yuan’s stability is temporary but transitory. One delicate balancing act is preserving the currency’s stability and addressing other economic issues, such as increasing debt and structural reforms (Shih, 2019).
However, the impacts of these measures are extra effects for a period after that. This has real effects on interest rates inside the country, which consequently affect the borrowing costs of the financial institutions and private firms, including the intentional focus on the Yuan, tightened limits to the movement of cash out of the country, and interest rate adjustments. Therefore, they can significantly affect corporate investments and derail Chinese economic growth. The approach used by the People’s Bank of China (PBOC) can be best described as a delicate trapeze. It includes implementing an agenda to maintain short-term monetary stability and dealing with immediate economic problems. This demands an all-round and superior strategy that results in the ensuing steady development.
The impossibility of achieving all three objectives at once means that the two most important policy measures of the PBOC are now likely to curb capital outflows and changes to interest rates. Restricting yuan outflows is one way the PBOC will stabilize its currency and prevent capital flight and inflations. One of the levers is the adjustment of interest rates that may affect the borrowing costs and, hence, domestic investment and GDP growth. According to Shih (2019), the PBOC can apply these instruments to overcome immediate concerns about the Yuan’s stability as it brokers the dilemma that awaits it.
Although China’s recent efforts to stabilize its currency make us comfortable in the short term, they are also significant impediments and trade-offs. However, the PBOC’s strategy is to focus on the Yuan regarding a short-term solution. This requires careful consideration of the difficult trade-off between the need for currency stabilization and more significant economic problems, including mounting debt and the necessity for structural reforms. These measures have longer-term implications regarding domestic interest rates, company investment abroad, and the broader growth trajectory for China.
Reference
Shih, V. (2019). China’s credit problem. New Left Review, pp. 115, 59–74. https://china.ucsd.edu/_files/chinas-credit-conundrum.pdf
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