Neal Kimberley

Macroscope | Henan bank crisis threatens to derail China’s efforts to maintain a stable yuan

For China, a stable yuan, particularly in the face of a rising US dollar, is an important symbol of market confidence in its financial system

Now, though, the banking crisis in Henan, where billions in deposits have gone missing, could shake investor faith and drag down the yuan if Beijing does not act swiftly

Reading Time:3 minutes

Why you can trust SCMP

With US interest rates going up and the dollar set to stay strong, a stable yuan remains in China’s best interests. Photo: Reuters

Neal Kimberley

Published: 12:30pm, 19 Jul 2022

Working for a stable yuan on currency markets has been a policy cornerstone for the People’s Bank of China (PBOC) of late, the central bank’s success being reflected in the stability of the renminbi against a basket of currencies even as the values of those currencies fluctuate dramatically on foreign exchanges.

The PBOC will need to double down on this policy. A constant yuan remains in China’s best interests but a dark cloud over Henan province needs to be dispersed lest the issue of renminbi stability comes under market scrutiny.

Even darker clouds elsewhere have already turned into a typhoon. In Sri Lanka, with US-dollar commodity prices already on the rise, broader economic mismanagement and poorly thought-out policies combined to trigger a collapse in the value of the Sri Lankan rupee against the dollar this year.

Exacerbating existing imported-commodity-derived inflationary pressures, this collapse has culminated in economic disaster for the Pearl of the Indian Ocean, as well as massive social unrest and the flight and subsequent resignation of president Gotabaya Rajapaksa.

But Sri Lanka is not China. In China, the PBOC has a handle on matters and has shown candour in addressing developments on foreign exchanges.

While acknowledging, on June 2, that US dollar strength in recent months “had gone beyond expectations”, PBOC deputy governor Pan Gongsheng also made the valid point that “the yuan has been relatively stable compared to the level of depreciation of other major currencies against the US dollar. And it has been stable against a basket of currencies.”