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| People's Bank of China HQ- Beijing; Photo Courtesy: Max12Max, Wikipedia |
When the dragon starts dancing wildly, it is going to make
others nervous and markets volatile. Currently, when the world economy is crashing
due to COVID related lockdowns and production losses, China is adding more
fuel to fire by voting a plan to introduce new security laws to Hong Kong -
former Crown colony of the British Empire. Hong Kong Crisis and rising tensions
with US is causing yuan to fall farther - lowest level against USD in eight months
[1]. Chinese central bank was intervened
for the 9th consecutive trading day [1] in the market to release the downward pressure
on yuan.
Just after US Secretary of State's declaration to the US
Congress that, they do not consider Hong Kong suitably autonomous from mainland
Chinese rule; National People's Congress voted in favor of introducing new
laws. Whether the city is autonomous or not is an important factor in deciding
whether Hong Kong will continue to get preferential economic and trade
treatment from the US. Losing this status will force a lot of companies operating
there to reevaluate their strategy; this can even threaten Hong Kong's future
as Asia's financial hub.
The ironic fact is, depreciation in yuan hurts the US, European and
other nations which imports Chinese products much more than it affects China.
However, it is very risky for the Chinese to let the currency slip as other
countries will declare China a currency manipulator and add penal tariffs on
imports from China.
The question is will China's central bank defends yuan’s
fall and stabilize it; if yes, then how long?
References
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