The massive risk inherent in [China’s slight devaluation] strategy became painfully apparent this week, gathering momentum Thursday and hammering global markets from stocks to commodities. The reason: The People’s Bank of China’s efforts to steer the currency lower were pounced on by investors who sold in droves, effectively engaging the central bank in a titanic struggle over who gets to control how far and fast the yuan declines.
Even after guiding the yuan to its lowest level against the dollar in five years on Thursday, the central bank was forced to start buying again to stop the decline turning into a rout at the hands of global traders, many of whom sit just off China’s mainland coast in the skyscrapers of Hong Kong.
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China’s reserves slumped a record $108 billion to $3.33 trillion as of the end of December from the previous month, data showed Thursday. The drop is nearly five times what analysts estimated.
“China is now paying the price for its halfhearted approach to market liberalization and its inability to cut the cord from heavy-handed state control of markets and the economy,” says Eswar Prasad, a Cornell University professor and former China head of the IMF.