China owns more than $3 trillion in foreign-exchange reserves, a key tool for currency management. Here's how China's hybrid financial system works.
By Mike Bird and Steven Russolillo Aug. 6, 2019 4:51 am ET China has let the yuan depreciate beyond the key level of 7 per dollar, prompting the U.S. Treasury to label it a currency manipulator. This escalation in the U.S.-China trade war has rattled global markets.
Mainland China used a system like Hong Kong’s until 2005, but today the yuan is somewhere in between. Authorities fix a daily midpoint—based partly on the previous close—and let the onshore yuan trade as much as 2 percentage points above or below this level, intervening to buy and sell the yuan if it rises or falls too far. That caps daily volatility. Analysts say the central bank’s guidelines give it plenty of discretion in setting the yuan’s value.
On Tuesday, the PBOC said it would sell yuan-denominated bills in Hong Kong, a move aimed at mopping up funds and removing a source of downward pressure on the offshore yuan. China’s major state-owned banks can also help out—sometimes in indirect ways. Last year, they bought swaps—a roundabout way to bolster the currency without immediately depleting reserves.
The PBOC nowadays tracks the yuan’s value against various counterparts, which has reduced the role of the dollar in determining its value. But the relationship with the dollar remains crucial, due to the greenback’s central role in global trade.
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