While still an unpopular opinion, FT Alphaville explores the possibility that China’s currency is overvalued in light of the contraction of the PBOC’s foreign reserves in April as the yuan depreciated against the dollar.
Yet, this begs the question of whether this is actually a trend, or just a one-time problem for China. Alphaville leans toward the latter. The change might be due to “moves in the broad U.S. dollar [that] cause changes in foreign reserves by triggering exchange market operations” by the PBOC.
“But,” Alphaville writes, “emergency rate cuts are definitely a sign that something may be up.”
“A contraction in foreign reserves will be the first sure sign that the dynamics have changed completely,” they say. And given China’s importance in the global economy, this is definitely something to watch.
