After prolonged loss of the currency’s value and frequent shut down of the stock market, China has launched stringent measures to correct its market and currency. Reports from financial quarters indicate that the government and the central bank are issuing unpublished warnings to banks and corporate to stop buying dollars beyond a level.
This latest move on checking dollar outflow, which is called capital control, is usually adopted by an ordinary developing country while facing foreign currency scarcity.
The Peoples Bank of China has already sold significant amount of Dollar into the foreign exchange market to stop further depreciation of its currency. In December itself, the PCB has sold $108 billion dollars in the foreign exchange market to arrest the fall of Yuan.
Ever since the IMF has included Yuan as a hard currency, its value is declining amidst negative feedback effects of the slowing Chinese economy.
Analysts identify that the root cause of the current peril for the economy is the steeper than expected slowdown.
The overvalued stock market is responding to the negative development in the economy by registering strong decline.
Adding misery to the economic slow sown is the divergence between offshore and domestic values of the Yuan. The divergence between the two rates should be brought down. But this necessitates devaluation.
Devaluation now though appear a weak move, may add more export revenue. In the coming weeks several other restrictive measures including foreign currency dealings and stock sale may be initiated to stop the current meltdown in the market.
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