Daniel Atlmann writes: The People’s Bank of China, led by Governor Zhou Xiaochuan, has been slowly liberalizing currency and capital markets for several years now. Last week, though, it made a monetary policy move that surprised people around the world. A week later, those same people can’t seem to agree on what it means.
The central bank has long allowed the exchange rate of the dollar and the renminbi, China’s currency, to move within a band that has gotten slightly wider from year to year, until reaching its current range of 2 percent on either side of a fixed opening rate. Every morning when trading began, the midpoint of the new band would be similar to the closing rate from the previous day.
Some China hands pointed out that Beijing has been trying to gussy up the renminbi in advance of the International Monetary Fund’s (IMF) decision in November on whether to include the yuan in the basket that forms its own distinct currency, the Special Drawing Right. Inclusion would make little difference to China’s economy in itself, but it would be a stamp of approval that the renminbi was on its way to being “convertible” — freely usable and tradable around the world.
The only way to know the Chinese central bank’s true intentions is to find out exactly what it was up to last week. If the bank was injecting renminbi into the market in order to increase its supply, then the fall in the exchange rate was probably deliberate. But if the bank was sucking renminbi out of the market all along in order to support the currency — and then stopped last week — then the dip was just the currency finding its fair value. In that case, any boost for exporters was just a convenient bonus.
Pundits can claim all the expertise they want, but the answer still has to come from the mouth of a Chinese central bank official. And the bank is sticking with the market forces story. Bank officials say the currency isn’t undervalued and is unlikely to drop further.
This episode is likely to be a footnote in Chinese economic history. The overall trends are more liberalization of currency and capital flows, and more focus on domestic demand rather than exports.
Still plenty of people are still betting on short-term currency moves, and stock markets around the world are reacting to the prospect of more globally competitive Chinese exports.
