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What's going on?
China appeared to intervene in the trading of its own currency, the yuan, on Monday in what is probably a rebuke to investors betting on it losing value
What does this mean?
As is usually the case with China, its not totally clear whats going on, but it appears that China does not want the value of the yuan to fall precipitously against other major currencies, especially the US dollar. This makes sense: a crashing currency could cause all sorts of problems for China as people and businesses would probably rush to move money out of the country.
Nevertheless, some investors think that a weaker yuan is inevitable (for a variety of reasons, but, in short, because they think Chinas economic growth is precarious). In order to curtail bets against its currency (which serve to push down the value of Chinas currency), traders suspect that China is buying large amounts of the yuan on the open market.
Why should I care?
For the markets: China cant keep buying its own currency forever.
In order to buy yuan, China must sell another currency (usually dollars). It has over $3 trillion in what Finimize calls its piggy bank of savings (its technically called foreign currency reserves). So, its got quite a bit of firepower to buy its own currency but its not unlimited. If signs emerge that China is, once again, having to buy a lot of yuan to protect its value, it could reignite fears that Chinas currency will, eventually, fall sharply in value (and that would probably be bad for the global economy and markets).
The bigger picture: China would like the yuan to be treated like a major international currency but moves such as this hurt its credibility.
The International Monetary Fund (IMF) is set to include the yuan as one of its key currencies on October 1st (it will join the dollar, euro, pound and yen). Such currencies are supposed to be freely traded. The IMF is including the yuan (supposedly) on the understanding that China will continue to take steps to make its currency freely traded – but Mondays actions show that China wont always be willing to move in that direction…
Originally posted as part of the Finimize daily email.
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