Newsmaker: Zhou Xiaochuan, governor of the People's Bank of China
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.
In a bid to ensure there's enough cash sloshing around for banks to boost lending in a slowing economy, the People's Bank of China last week cut the percentage of deposits banks must lock away and lowered benchmark interest rates.
But as recent events have shown, that compounds capital outflows and depreciation pressures, meaning the need for currency intervention and the resulting liquidity constraint may soon confront Zhou all over again.
"If there's depreciation pressure but the central bank doesn't want to let the yuan depreciate, it has to sell foreign exchange to support the yuan exchange rate," said Yu Yongding, a former academic member of the PBOC's monetary policy committee.
With investors trying to gauge how much of its foreign- exchange reserves China will end up spending, the shift may force central banks elsewhere to offset the loss of liquidity with easier monetary policy than they previously anticipated, he said.
That could mean the Federal Reserve delaying raising interest rates or the central banks of Japan and the euro area buying more bonds.
This isn't the first time Zhou has had to face off with markets in his almost 13 years as governor. In the decade since he revalued the yuan in July 2005, he faced waves of money inflows betting on a stronger currency.
His response was to oversee a modest-but-steady appreciation by buying dollars and selling yuan, which he had to print to do so and then force banks to lock away for fear of stoking inflation.
All of a sudden, the shoe is on the other foot.
Yuan positions at the central bank and financial institutions fell by the most on record in July, a sign capital outflows picked up and the PBOC had stepped up intervention to support the yuan.
"If the central bank releases the end-August foreign exchange reserve numbers in early September and there's a big monthly fall, say $200bn, it will be very painful for the central bank," said Chen Xingdong, chief China economist at BNP Paribas in Beijing.
If the PBOC is able to revive animal spirits and shore up confidence with continuous monetary-policy easing, Zhou may find a way out of his Catch-22.