Home / Business / China Stabilizing the Yuan is remarkable. That’s weird.

China Stabilizing the Yuan is remarkable. That’s weird.

Commercial conflicts may not be as easy to win as Donald Trump claims. Its main objective, China, is the victor in the public relations war.

From the economy to the markets and the art of governing, China these days is seen as the stabilizer and the United States as the disruptor picking fights.

This week the People's Bank of China was widely praised for its promise to keep its currency stable. This "verbal intervention" indicated that the central bank did not want an extended slide in the value of the Chinese currency, the yuan, and that the government would not weaken the exchange rate to gain advantage in its commercial struggle with the United States. from the central bank's financial research institute added that "China defends multilateralism, globalization, free trade and international standards-based guidelines."

Good for China. That is exactly the line that the world's largest exporter and the second largest economy should take. But the applause that received the comments on Tuesday tended to miss the point: the yuan is a highly managed currency, much more than any other major economy (and a large number of small ones, for that matter). Very little happens that the PBOC does not want to happen. Exercises significant control, even in times of calm. This is not the "invisible hand" of the free market.

The notion that the People's Bank of China somehow launched a major intervention or initiated a huge change in the market leaves out a ton of context. This is not like Federal Reserve Chairman Jerome Powell or European Central Bank President Mario Draghi woke up one morning and decided they were going to draw a line below the dollar or the euro. Even Japan, which used to push the yen, has long retreated from active participation in the market.

The People's Bank of China establishes a daily reference rate for the yuan after receiving submissions from the lenders. The currency is allowed to fluctuate within a daily limit of 2 percent on each side of that reference rate. In practice, it is rarely remotely close to 2 percent. (From time to time, banks are ordered to change the way they calculate their presentations at the daily reference rate, sometimes known as fixation). The government also maintains strict control of China's capital inflows and outflows.

China has made important advances to allow flexibility over the years. Until 2005, the yuan was set at around 8.3 per dollar. In July of that year, the People's Bank of China began to allow daily movements of 0.3 percent and has steadily, albeit slowly, expanded that commercial band. China also allowed the yuan to fluctuate against a basket of currencies; Most of the time, the dollar rate has been the one to watch. Over time, China felt more comfortable in letting the yuan appreciate or decline gradually. Movements can add up: as of Tuesday, the yuan was the worst performing currency in Asia in the last three weeks. It has dropped 2 percent this year.


Source link