The renminbi’s fall through the closely watched and previously well-defended threshold of Rmb7 to the US dollar last week has added to pressure on the Chinese currency on multiple fronts — posing a challenge for the foreign exchange watchdog, which is keen to keep capital flight in check.
Sudden declines in the value of China’s currency often prompt rich Chinese people to move money into US dollars or assets such as foreign real estate to avoid further wealth depreciation.
In addition, as the currency loses value against the dollar, Chinese companies with large US dollar debts are forced to exchange greater amounts of renminbi to make payments on offshore bonds. Strategists also fear the country will attract less foreign investment, a crucial source of capital inflows that help underpin the currency.