China restless due to Yuan's decline, indicative of restriction on foreign investment

Beijing: The results of recent elections in the United States has begun affecting the Chinese economy and the Chinese Yuan is beginning to decline. Within two weeks following Donald Trump’s victory, the Chinese Yuan is getting extremely devalued. Currently the Yuan has sunk to a eight and half year low against the US dollar. To curb Yuan’s further decline, China’s Central Bank i.e. the People’s Bank of China has indicated to restrict foreign investments by Chinese companies.

The US President-elect, Donald Trump has persistently taken an anti-China stance while threatening to declare China as a ‘Currency Manipulator’ and to levy heavy tax on Chinese imports. In such an event, a trade war may erupt between the US and China. Even though China had threatened the US on these grounds, Trump’s victory has caused unrest in the Chinese economy and has lead to decline in the Yuan.

Prior to the US elections, the Yuan was at 6.77 against the US dollar. However, while a decline of the Yuan by nearly one and a half percent has been reported, the Yuan is at 6.91 against the US dollar. In the past one year, the Yuan has lost nearly 6.2 percent of its value against the US dollar and has sunk to its lowest levels in the past eight and half years.

The US dollar is strengthening at the international level due to Trump’s victory and there is a possibility of a hike in the US interest rates. This has had a significant impact on all major international currencies and is now beginning to hit China as well. Reports of Chinese companies as well as entrepreneurs converting the Yuan to US dollar in large amounts are emerging.

A few months back, China was successful in getting its currency included in the International Monetary Fund’s basket of ‘reserve currencies’. Previously, China had agreed to the condition of keeping the value of Yuan in accordance with the international markets. Hence, changes are occurring in the Yuan value in accordance with the Chinese and international market trade. Even though China’s Central Bank has the right to regulate this, its capacity in this regard is limited. Therefore, the Chinese Central Bank has to spend the US dollar on a large scale to control and regulate the Yuan value.

Although it is said that China has a huge foreign exchange reserve, the prevailing condition is not as it was in the past. The reserve that consisted of 4 trillion dollars in the year 2014 has depleted to 3.12 trillion dollars at present. This is its lowest value in the past five years. Due to depleted reserves, the capacity to stabilise the Yuan by selling the US dollar in the market, has been restricted. This is why China has indicated of restrictions in foreign investments.

It is believed that an investment of 1 billion dollar or more in foreign property or other non-related areas by Chinese companies and capital outflows through Shanghai’s ‘Free Trade Zones’ will be targeted. It is being claimed that a proposal in this regard has already been sent to the Chinese parliament. However, it is being said that these type of restrictions would have a negative impact on the Chinese foreign investments as well as its image at international level, and its economy would have to bear its brunt. Hence, the sharp decline in the Yuan appears to be causing a slowdown in the Chinese economy.