China has prided itself on its economic development over the last decade. China’s ability to generate a huge amount of foreign currency from international trade has allowed it to be prosperous and elevate its international credibility. In 2015, China held $4 trillion in foreign currency from other countries. In the past, China has been able to pump this money into infrastructure and other building projects. This rapid growth encouraged foreign nations to also invest in these projects. However, in recent months China’s reserves have fallen - approximately one third of its reserves have dissipated in the last three months.
Now, however, China’s economy has begun to slow down, and foreign countries have begun to divert their investments in other countries (e.g. Japan). Other developing countries are beginning to become competitive with China’s cheap labor and export advantages. Foreign countries are now looking to other places as China has become more developed but more expensive to invest in.
All of this is contributing to China’s recent struggle to maintain its currency value. Many people believe that the People’s Bank of China will let the Yuan (also called Renminbi) depreciate instead of taking more out of their reserves. This is crucial to China’s ability to stay competitive in the labor market, and so Chinese officials are limiting Chinese banks from lending Yuan in order to maintain control over the amount of currency in circulation. China has also begun tightening its own foreign investment, hoping to maintain control over the outflow of Yuan.
China has always had a tight control over the valuation of its currency. Until now, it has been able to successfully maintain the Yuan’s value, and encourage the large inflow of foreign investment. Now that this has begun to slow, investors are concerned about how long China can dip into its reserves until it will be forced to devalue its currency, which will further drive away foreign investment.