China Can't Quit the Dollar

The idea, at least in part, is to persuade ordinary Chinese that their nest eggs are safe in renminbi. Unfortunately, this latest effort isn't likely to work any better than earlier ones. The yuan remains inextricably bound to the U.S. dollar -- and everyone knows it.

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Yet any cursory review makes clear that the link between the yuan and the dollar remains as tight as ever. In November 2016, 98 percent of turnover in China's foreign-exchange market took place between those two currencies. Flows of capital into and out of China show an only slightly less lopsided pattern. Between them, the U.S. and Hong Kong dollars (the latter is hard-pegged to the U.S. currency) account for 91 percent of China's non-yuan international bank transactions. The smaller currencies that make up nearly half of the basket comprise only 1.7 percent of international bank payments and receipts.

Even the Bank for International Settlements estimates that 80 percent of China's local loans in foreign currency are denominated in dollars. That's the number that really matters: If the yuan continues to fall against the dollar, companies are going to have a harder time paying back those loans regardless of what the renminbi is or isn't worth against the government's official basket.

All this is clear to ordinary investors. During my nearly eight years in China, I've never heard any Chinese citizen worry about the value of the yuan against the Emirati dirham. So as long as the yuan continues to depreciate in dollar terms, Chinese are going to look for ways to get their money out of the country, despite any barriers the government might throw in their way.