ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Case of China

Currency Concerns under Uncertainty

The recent downslides in China's financial account balance, bringing to a close the "twin surpluses" and initiating, after a long time, a modest slip in the stock of offi cial reserves, reflect a reversal in the state of expectations relating to the future of the Chinese currency.

In this note we focus on some aspects relating to China’s currency, which of late, have opened public debates, in the literature as well as in policy statements.

Apprehensions and concerns have more to do with the negative balances that have surfaced in China’s financial balance since the last quarter of 2011. The negative sums were (-)$3.02 billion and (-)$4.21 billion during the second (Q2) and third quarters (Q3) of 2012 respectively, and preceded by an even larger sum of (-)$29.0 billion in fourth quarter (Q4) of 2011. Deficits, as above, are in sharp contrast with the usual surpluses in China’s financial account which, while contributing to the twin surpluses, amounted to as much as $13.20 billion during Q4 of 2010. Changes, as above, in the financial account have led the country’s official reserves to slide downwards by as much as $6 trillion between March and June 2012 (safe.gov.cn). With negative financial balances and reductions in official reserves, downward pressures were there on the renminbi (RMB), which actually depreciated, from 6.30 per dollar in April 2012 to 6.41 by August 2012. The rate, however, reverted to its earlier pattern with appreciation, and the RMB moved up, from 6.38 to 6.31 to the dollar between 24 July 2012 and 18 January 2013.1

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