The yuan dropped 7% against the dollar this year, taking the currency to levels last seen before the global financial crisis. But the slide did little to relieve pressure on China’s financial system, according to The Wall Street Journal. Unlike other emerging markets that have mostly free-floating currencies such as Russia and Brazil, China hasn’t had a chance to find its bottom. Chinese investors, therefore, act as if more depreciation is coming, sending money overseas. China expended $300 billion in reserves on a balance of payments basis intervening in currency markets to prevent the yuan from falling even further. China still has a bit more than $3 trillion in reserves, which is robust. However, the ratio of M2 to reserves, rose to 7.4 from 6.3 this year. Sharp rises in this ratio can be a precursor to a crisis in emerging economies.
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