What's going on?

We�ve written before about China�s �piggy bank� of US dollar-denominated savings. These savings continued to decline in January as a result of China tapping these savings to stop its currency, the yuan, from falling too quickly.

What does this mean?

China�s yuan is falling in value versus the US dollar: it�s declined 6% since August. As Chinese people and businesses � and international investors � become more convinced that the yuan will fall in the future, they are trying to take their money out of the country. That process involves selling yuan and buying another currency (usually the US dollar) � which increases the pressure on the value of the yuan. In order to support the yuan�s value, the Chinese government is taking the opposite side of that trade: it is buying yuan by selling US dollars from its �piggy bank� (savings).

Why should I care?

Bigger picture: Fears are increasing that the yuan�s value could collapse. In the past week it was reported that a few major US hedge funds (see our definition of a hedge fund) are betting on this happening. China has $3.23 trillion of US dollar �reserves.� That sounds like a ton, but at a pace of $100 billion of declines per month that would evaporate in 32 months. And as the piggy bank gets smaller, people�s desire to move money out of China gets more urgent, which means China needs to spend more dollars to prop up the yuan. The risk is increasing that China won�t be able to afford to protect the yuan from falling dramatically.

For markets: A weak Chinese currency contributes to a slowing global economy. As the yuan becomes worth less, Chinese people and businesses can�t buy as much stuff from countries that are used to selling things into China (things like copper, big machinery and iPhones). This then results in a global decrease in �demand� for such things, which hurts economic growth globally.