Catch-22 for Zhou as Yuan Support Means Quantitative Tightening
The effort to stem yuan depreciation is draining liquidity
Liquidity shortage adds need for easing, pressuring the yuan
There’s a Catch-22 confronting Zhou Xiaochuan.
To defend the yuan from rapid depreciation, China’s central bank chief is having to intervene to buy yuan and sell dollars, drying up liquidity in the banking system. That’s a brake on growth that leads to more downside pressure on the currency, increasing the need to intervene in the foreign-exchange market, draining liquidity anew. And on it goes.