Investor jitters put pressure on yuan

The State Administration of Foreign Exchange announced early this month that China's annual capital and financial account deficits hit $96 billion last year, a new record high.

With the yuan trending toward devaluation, exchange settlements by businesses and individuals are decreasing. Meanwhile, foreign exchange purchases and overseas acquisitions are increasing. With the value of the euro falling, many Chinese enterprises see this as a good time to invest abroad.

It has been argued by Gao Jie, an associate professor at the School of Banking and Finance at University of International Business and Economics that China's record-setting capital and financial account deficits are related to an increase in Chinese companies' foreign investment relative to inbound capital flows. Data from Beijing-based research firm Anbound though suggest that this might not be the case.

Many observers and investors are concerned about signs of a slowdown in the real economy. Consequently, they are turning their backs on the renminbi. Short-term operations may be able to stem cash withdrawals, but inspiring true faith in China's currency will require long-term effort.