China’s foreign exchange regulator, the People’s Bank of China, has “fled” the dollar as its economy has been hit by a massive drop in global demand.
The People’s Commissary Department has stopped selling the US dollar as the world’s largest economy has fallen into a two-week period of weakness, according to a report in the state-run Global Times newspaper.
It is the first time since the US central bank was set up in 1913 that the central bank has not sold the currency.
In the past it has sold the US dollars in dollars, but it stopped doing so on Thursday after falling into a “crisis of confidence” among the world economy, the newspaper said.
“The central bank now has to do a big deal of adjustment in terms of buying and selling the dollar,” the Global Times said.
“In the short term, the central will have to buy the dollar.
But this is not a solution to the problem, and it is not something to be taken lightly.”
The Chinese currency was trading at around 6.15 per cent of the greenback on Thursday, below its 10-year low of 6.27 per cent in December and the worst trading day in five years.
It is currently trading at its lowest level since April 2015.
Despite the fall in demand, China’s currency remained the world currency in October, and in December it traded above the dollar, which at the time was trading around $US1.15.
The People on Thursday also announced it would raise its short-term interest rate by a quarter point, from 2 per cent to 2.5 per cent, as it attempts to contain inflation.
Chinese authorities have previously raised short- and long-term rates twice, but this is the second time in as many years that they have done so.
Although the People are raising rates, the rate of the central government has not changed, according the China National Offshore Oil Company.
Its spokesman said the centralbank had taken measures to ensure it can sustain economic growth through the economic slowdown.
Beijing’s decision to raise the short-run interest rate comes after a series of rate rises in the past two years, including a 5 per cent increase in February and a 7 per cent hike in March.
According to the People, its move is a response to the collapse in demand and to prevent the economy from falling into recession, as a result of a sharp drop in the global economy.
On Thursday, the global markets also fell as China and the US traded their worst trading days in five months.
China’s stock market has dropped by 10 per cent this year and the Shanghai Composite Index fell more than 30 per cent.
A further 12 Chinese companies, including China Railway Construction, China General Construction, Guangzhou Automobile Group, the state owned China Railway Company, the National Development and Reform Commission, and the National Coal Association, have all been suspended.
Investors have also been hit, with shares of major global players such as Goldman Sachs, Morgan Stanley and JP Morgan down nearly 2 per 100 million yuan ($1.8 million) in the last 24 hours.
This comes as the country is facing an international economic slowdown as a number of countries are stepping up efforts to cut back on their trade deficits.