US media have been up in arms after China started to devaluate its Yuan, accusing it of starting a currency war with the US dollar. Nonsense, argues economic expert Arthur Kroeber in the Business Standard. China has long been blamed for manipulating its currency, a practice it is going the abolish, although it might not make everybody happy in the short run.
My suspicion is that in a few months’ time all these anxieties will prove to have been overblown. First, the moves in the renminbi so far are significant in terms of the currency’s own past history, but are pretty modest by the standards of currency markets in general – especially given that over the previous year the renminbi had appreciated in real effective terms by more than 10 per cent because it was chained to an ultra-strong dollar. The forward market has been pricing the renminbi at around CNY6.5 to the US dollar, which seems roughly fair value, and a devaluation much beyond that, to CNY6.6 or CNY6.7, is likely to draw buyers with a longer time horizon back into the market. Most likely the Fed sees all this, and will not use China as an excuse to delay its rates hike.
Second, by timing this move now the PBOC has done its best to ensure that the renminbi’s gyrations will be finished by the time Xi goes to the US in September for his summit with Obama, and certainly by the time the IMF board meets in November. If the PBOC continues to follow through on its pledge to let the market have the main say in the daily fixing, it will quickly become much harder for the likes of Schumer to credibly argue that China’s currency policy is a mercantilist conspiracy.
The key thing now is for the PBOC to establish its credibility as the steward of a market-driven exchange rate, and as the vanguard of China’s much needed financial liberalisation. After the stock market rescue (in which the PBOC appears to have been a most unwilling participant), confidence in the trajectory of China’s economic reforms has suffered severe damage. A show by the central bank that it is willing to let the market guide the exchange rate, and that it will stay this new course even if the short-term consequences are inconvenient for the politicians, would be a sign of maturity and strength. Good luck to it.
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