China’s sinking stock market and the government’s assiduous efforts to shore it up have been reported at length. Traders and exporters follow the gyration of the renminbi exchange rate following China’s loosening of the trading bands, allowing more fluctuation in value.
However, growing capital flight from China raises questions about the renminbi becoming a reserve currency.
The global panic in financial markets in August was catalyzed by the relatively sudden devaluation of the Chinese yuan – from 6.2 to 6.4 renminbi per dollar. The Chinese government may have had several reasons for setting the daily reference rate for the currency at a lower level – to signal greater market flexibility or to support exporters. However, the fact is that enormous amounts of liquid money held by Chinese individuals and companies have, for many years, been anxiously trying to leave China and the renminbi as an asset, and instead park in non-Chinese assets such as condominiums in Manhattan or Sydney, US stocks, Singapore bank accounts or simply luxury goods. That created the devaluationary pressure in the exchange markets.