Two notable changes are coming to China’s approach to international finance, both closely tied to the precipitous decline of the US dollar in 2017. First, the PBOC has changed the way its manages the currency by suspending (though not formally ending) the countercyclical component to its formula, and in doing so has relinquished some of the control by removing a component of the formula. The factor had been introduced in May to help blunt the impact of volatile market forces on the currency’s valuation.
At the same time, China is working towards reducing its purchases of US Treasuries. Bloomberg reports:
Senior government officials in Beijing [are] reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter. The news comes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus. Yields on 10-year Treasuries rose for a fifth day, touching the highest since March.
I suspect that both developments are closely tied in part to the declining US dollar, which had its worst year in more than a decade. The fall of the greenback gives the yuan more relative strength in currency markets, and lessens concerns about a depreciating renminbi that could impact its internationalization. Meanwhile, the dollar’s decline makes Treasuries a much less attractive asset class relative to other government currencies and securities, including the euro.
Political tensions, obviously, between the countries, have not helped, either.