There are plenty of things luring short-sellers to the Chinese yuan right now. Growth is slowing. Capital is flowing out. And by some measures, the yuan is the most overvalued currency in the world. Yet there’s one big reason not to bet against it: The People’s Bank of China is on the other side of the trade.
Chinese policy makers will do whatever it takes to ensure a stable exchange rate before the International Monetary Fund starts discussing the possibility of adding the yuan to the ranks of the world’s reserve currencies in May, according to Barclays Plc and DBS Group Holdings. They’ve already been tapping their almost $4 trillion in foreign reserves to do this, spending an estimated $33 billion in the first quarter to halt a slump that had sent the yuan to a more than two-year low in March.
While a weaker exchange rate would help boost exports and shore up the slumping economy, it’d undermine China’s push to make the yuan a suitable currency for international trade and finance. The inclusion in the IMF’s so-called Special Drawing Rights is the centerpiece of President Xi Jinping’s ambition to challenge the hegemony of the dollar and a global economic order dominated by the U.S. and Europe.