Compounding those stresses,the results of well-intentioned but poorly-executed policy decisions,have been events beyond China’s control – soaring global energy pricesand severe droughts and floods.

The prospect of China achieving its targeted economic growth of 5.5 per cent this year is remote. More likely the GDP growth number will have a “3” in front of it,at best.

The steady reduction in China’s hoard of US Treasuries probably relates to its currency and its efforts to avoid significant depreciation of the yuan,which would be inflationary but,more particularly,could add to the volatility within its financial system and economy.

China runs a managed float of the yuan,which it allows to trade within a two per cent range,plus or minus,from a daily “fixing” by the People’s Bank of China. It has been notable in recent weeks that the PBOC has fixed that rate at levels well above market expectations – it is trying to keep the yuan from sliding against the dollar.

Or should that be sliding further. The yuan has fallen to two-year lows against the US dollar,depreciating about eight per cent since mid-April. A dollar bought 6.4 yuan at the start of the year;now it buys 6.9 yuan. It would appear the PBOC is trying to ensure its currency doesn’t breach the 7 yuan to the dollar level it reached in July 2020 in the initial phase of the pandemic.

China’s central bank has reportedly been telling its big state-owned banks to sell – and not to buy – US dollars as part of its efforts to contain the extent to which the yuan depreciates against the dollar. The running down of its US debt holdings would have a similar effect.

At this point trying to prop up the yuan would have little to do with any fear of inflation. The COVID lockdowns,property crisis and extreme weather events have worked to help keep inflation under control,along with a quite conservative response,by Chinese standards,to the slowing of the economy.

There have been some modest reductions in the PBOC’s interest rates,including one last month,and some relatively modest (in comparison to previous packages) fiscal stimulus.

Last month Premier Li Keqiang announced 19 new economic support policies and sent high-ranking officials to direct local governments to do more to help stabilise economic growth. The policies had a combined value of 1 trillion yuan ($210 billion).

A depreciating currency does make exports more competitive so the efforts by the PBOC to defend its currency is,in conventional thinking,curious.

With the global economy slowing and perhaps heading towards recession,however,China’s authorities are probably more focused in trying to stimulate weak domestic demand and industrial activity (reflected in a weakness in China’s non-energy imports) than on exports.

The raw materials for China’s economy – whether oil,gas and coal or iron ore and other metals – are,of course,priced in US dollars,which provides another reason for trying to protect the currency and in the process its besieged industrial base.

It is also the case,however,that other Asian economies have become increasingly important to China’s own,as suppliers,consumers and competitors.

Most other Asian currencies are experiencing greater devaluations,which has raised the potential for financial instability and capital flights from the region as economies with significant US dollar borrowings and exposures to imports of commodities traded in US dollars come under increasing pressure from higher global interest rates and a stronger dollar. The region is experiencing stress from the stronger dollar.

The US dollar has strengthened significantly. Against a trade-weighted basket of its major trading partners the dollar has appreciated by almost 14 per cent this year.

That reflects the increasing divergence in US monetary policy from those of other major economies,including China’s.

US rates are being aggressively driven up in response to inflation levels not seen for decades even as China’s interest rates have been edging down.\

With the Federal Reserve Board’s Jerome Powell declaring at last week’s Jackson Hole conference that the Fed’s commitment to reducing US inflation (currently 8.5 per cent) to its target of two per cent is “unconditional,” the prospect is for US rates to continue to climb,widening the gaps with other economies’ settings and continuing to put upwards pressure on the dollar as global capital flows towards the higher yields.

Defending the yuan and taking profits from the selldown of its US Treasury holdings in the process might be a way of trying to quarantine its domestic economy from external threats while it focuses on dealing with the threats from within.

That,if the PBOC allowed the yuan to depreciate significantly and rapidly,would be a recipe for instability in China.

There have already been some outflows of foreign capital from China’s bond and equity markets,although China,while loosening controls in recent years,still has a quite strictly regulated capital account.

A wave of capital outflows would not threaten China in the same way they might destabilise other,less developed and tightly-regulated,economies but they could add to the existing instability within China’s financial system.

China has enough woes without importing any further instability. Defending the yuan and taking profits from the selldown of its US Treasury holdings in the process might be a way of trying to quarantine its domestic economy from external threats while it focuses on dealing with the threats from within.

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