By Li Xuanmin Source:Global Times Published: 2018/8/15 22:33:41
Capital controls, forex reserves offer security
The weakening Turkish lira will not drag on China’s currency as much as on those of other emerging economies like India and South Africa, as China maintains strict controls over capital outflows and also has abundant foreign exchange reserves, industry observers said on Wednesday.
Turkey’s economic woes worsened after US President Donald Trump announced on Friday that tariffs on Turkish steel and aluminum would be doubled. The Turkish lira slumped by about 20 percent the same day and the effects rippled through global stock markets and emerging markets’ currencies.
On Tuesday, the Indian rupee sunk to a new low of 70.08 rupees against the US dollar. It weakened further on Wednesday, although the Reserve Bank of India reportedly spent $23 billion to help stabilize the foreign exchange market.
The Argentine peso also hit an all-time low, trading at 30.36 per dollar as of press time on Wednesday. The country’s central bank on Monday also hiked its key interest rate from 40 percent to 45 percent.
China’s yuan traded lower on Wednesday, and its onshore price reached 6.9118 against the US dollar on Wednesday evening, the weakest level since May 2017.
The drastic currency fluctuations have fueled market concerns about whether there could be a domino effect from the Turkey crisis that might hit currencies in emerging markets, including China.
But Tu Yonghong, a professor at the International Monetary Institute at Renmin University of China in Beijing, said that investors are panicking too much about Turkey’s situation.
“The market at first tends to over-react. In recent days, investors and portfolio managers, in a herding move, sold the currencies of emerging economies like India and Argentina to steer away from potential losses,” Tu told the Global Times on Wednesday.
However, “Turkey is not a global economic center. It is not even a member of the EU. The country’s financial market also has minimal links with other nations, so the panic sentiment will calm down sooner or later,” Tu added.
China is different
Despite the tremors in emerging markets, experts said that the yuan is better placed than other currencies to withstand the effects of the Turkey crisis.
“A common issue for emerging economies has been a currency mismatch – when the dollar strengthens, assets in those nations are sold to pocket short-term gains, ramping up devaluation pressure on local currencies. But China does not have this concern because of its strict controls over capital flows and its robust real economy,” Cao Yuanzheng, chairman of BOCI Research, told the Global Times on Wednesday.
Besides, China’s supply of foreign exchange is also abundant and diversified, supported by China’s long-standing trade surplus and its ongoing opening of free trade zones, in addition to about $3 trillion of foreign currency reserves, Tu noted.
The situation is less sound for India, which has long suffered trade deficits and has had to attract foreign capital in the form of foreign debts, Cao noted. “This has made India more vulnerable to fluctuations in the external market,” Cao said.
In response to concerns about recent weakening of the yuan, Liu Aihua, spokesperson for the National Bureau of Statistics, attributed such fears to psychological factors.
“In the mid- to long-term, the economic fundamentals will prevail and the yuan exchange rate will remain stable at a reasonable and balanced level,” Liu said at a press briefing on Tuesday.
The People’s Bank of China, the central bank, also vowed in a report released in early August that it will apply a range of policy tools to “maintain the basic stability of the yuan’s exchange rate at a rationally balanced level.”