Macroscope | How a sliding yuan and volatile stock market have put China’s central bank in the hot seat

As recently as the middle of last month, it was central banks in advanced economies which were under the spotlight. 

The US Federal Reserve and European Central Bank, the world’s two largest central banks, both took measures to withdraw stimulus despite mounting concerns in financial markets about a policy blunder, made more acute by the Fed’s eagerness to push ahead with a faster pace of tightening in the face of the dramatic escalation in tensions over global trade.

Yet, over the past three weeks, it is emerging markets that have come under scrutiny, in particular China, the bellwether of sentiment towards developing economies, especially in Asia.

The 3.4 per cent slide in the yuan against the dollar in the second half of June – a fall which JPMorgan, in a note published last Friday, described as “nearly unprecedented” and “only comparable in magnitude to the August 2015 [surprise] devaluation” – has once again turned China’s currency into a focal point of market anxiety.

That there is intense speculation that the yuan’s decline is being engineered and used as a weapon in China’s trade dispute with the US is adding to market tensions. Given the renewed sensitivity of international investors to movements in the yuan, concerns about the credibility of China’s policy regime – the key factor behind the sharp sell-off in global markets in the second half of 2015 – are resurfacing at a particularly inauspicious time for emerging markets.