Capital Flight Pushes China to the Brink of Devaluation
Beijing cannot keep burning through reserves at a record pace to defend the yuan and at the same time loosen monetary policy. It has to choose
by Ambrose Evans-Pritchard
Telegraph.co.uk
China is perilously close to a devaluation crisis as the yuan threatens to break through the floor of its currency basket, despite massive intervention by the central bank to defend the exchange rate.
The country burned through at least $120bn of foreign reserves in December, twice the previous record, the clearest evidence to date that capital outflows have reached systemic proportions.
“There is certainly a sense that the situation is spiraling out of control,” said Mark Williams, from Capital Economics.
Mr Williams said the authorities botched a switch in early December from a dollar currency peg to a trade-weighted exchange basket, accidentally setting off an exodus of money. Skittish markets suspected – probably wrongly – that it was camouflage for devaluation. The central bank is now struggling to pick up the pieces.
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