Home' Trinidad and Tobago Guardian : August 16th 2015 Contents SBG14 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt AUGUST 16 • 2015
China s currency devaluation is
a step in the long march to a
more open regime for the
yuan, analysts say, but author-
ities will need to further loosen
their controls to promote long-
The central bank on Tuesday unveiled a
near two per cent devaluation of the yuan,
saying the move was part of broader economic
reforms aimed at moving towards a more flex-
ible exchange rate.
The suddenness and scale of the devaluation
in a normally stable unit rocked global financial
markets, as investors took it as a sign the
world s second-largest economy is performing
worse than revealed, and sparked worries China
had fired the first shot in a currency war.
It also compounded jitters over China s
financial health after a debt-fuelled stock mar-
ket bubble burst in June, following a 150 per
cent surge in the previous 12 months.
China s central bank soothed markets by
setting the daily reference rate of the yuan---
also known as the renminbi (RMB)---against
the US dollar marginally higher on Friday,
ending an almost five percent fall over three
Analysts cheered the move towards a more
market-based Chinese currency, but said other
reforms had become more urgent as the Asian
giant seeks a more sustainable growth model
in the face of a slowing economy.
"Reducing overvaluation of the RMB is a
welcome change that eliminates one source
of unnecessary self-inflicted pain," the Asian
Development Bank s chief economist Shang-
Jin Wei said Friday.
ANZ Banking Group s chief economist for
Greater China, Liu Ligang, hailed the move
as "very important" but said more reforms,
such as freer capital flows, liberalising interest
rates and more allowing financial products to
hedge against risk, were still needed.
If the bank had acted sooner, the impact
on the economy would be "more obvious", he
Killing two birds
The People s Bank of China (PBoC) used to
decide its daily yuan refence rate by polling
market-makers, but will now consider the
previous day s close, foreign exchange supply
and demand and the rates of major curren-
The yuan is restricted to trading up or down
two percent from the daily rate, although the
State Council, the cabinet, has signalled it
does intend to broaden the trading band.
China is currently bidding to join the Inter-
national Monetary Fund s basket of reserve
currencies, but the Washington-based lender
has said more reforms are needed for mem-
Beijing is "killing two birds with one stone:
it can release depreciation pressure to help
the economy grow and meet the IMF s require-
ment of letting the yuan be more market-ori-
ented", Zhang Ning, a Hong Kong-based econ-
omist for UBS, told AFP.
The yuan devaluation has also been seen
as a means for authorities to help the slowing
economy by boosting exports; a key driver of
China s extraordinary rise in the past three
For the Henry Parts company in the eastern
city of Ningbo, the devaluation means more
orders from foreign customers for its machinery
"The devaluation will increase our revenue
and we can get the orders we couldn t get
before," manager He Zhanyong told AFP.
China s economy expanded 7.4 per cent last
year, its weakest since 1990, and has slowed
to 7.0 per cent in each of the first two quarters.
The government wants growth of around 7.0
per cent for all of 2015.
Still, there are worries the move could set
off a "currency war" as regional neighbours
and other emerging market countries face
pressure to devalue to stay competitive.
"To some extent, the PBoC has served as
an anchor in the region and the move now
allows other currencies to weaken further,"
Societe Generale Group said in a research
Asia-Pacific currencies this week suffered
their biggest two-day selloff since 1998, during
the Asian financial crisis, while Russia s ruble
slid to a six-month low.
A disorderly devaluation could hamper Bei-
jing s push for greater global stature for the
yuan and the government s pursuit of a bigger
say in world finance, typified by its role setting
up two new multilateral banks for Asia and
the BRICS nations, which also include Brazil,
Russia, India and South Africa.
Argentina has nearly US$34 billion in foreign
exchange reserves but about a quarter are
denominated in yuan and their value declined
after the Chinese devaluation, Bloomberg News
Chinese central bank officials have denied
a currency war was the intention, but have
been more cagey about the timetable for further
reforms to the yuan.
Asked if China was on track to open its
capital account to investment flows this year,
as previously pledged, one official said the
process would be orderly.
Trick question: did China s cen-
tral bank intervene during the
past week to weaken the yuan
or to strengthen it?
Given all the headlines about devaluation,
weakening would seem the obvious answer.
In fact, the opposite is true: The bank first
tried to stand aside, giving the market more
say in the yuan s value, and then backtracked,
intervening to stem the ensuing decline. The
volte-face reveals much about both the oddities
of China s economy and the difficulty of
Every morning market-makers such as the
big state-owned banks submit yuan-dollar
prices to the People s Bank of China, the central
bank. It then averages these to calculate a
"central parity" rate, or midpoint. In the course
of the day, the People s Bank intervenes to
keep the exchange rate from straying more
than two per cent above or below the mid-
In theory it is the market-makers, not the
central bank, that set the midpoint and thus
the trading band. In practice, however, the
People s Bank gets market-makers to submit
rates that will yield its preferred midpoint,
irrespective of market sentiment; state-owned
banks are pliant, after all. Critics in America
and elsewhere long have alleged that China
has manipulated the market in this way to
keep its exchange rate cheap.
They had a point until 2012 or so. For much
of the past year, however, the central bank has
tipped the scales in the opposite direction,
preventing a depreciation even as the Chinese
economy weakened and the dollar surged. In
recent months, especially, trading of the yuan
regularly has swung toward the weak end of
the two per cent band, but the central bank
has nudged it back up by orchestrating stronger
The reform the People s Bank announced
on August 11 sought to change this. From now
on, the central bank declared, the midpoint
would simply be the previous day s closing
value. Given that traders had been selling and
buying yuan at a big discount to the manip-
ulated midpoint, the new market-determined
midpoint immediately fell by 1.9 per cent, the
biggest single-day drop in the yuan s modern
That led to an even weaker market-deter-
mined midpoint on Aug. 12, whereupon the
yuan fell yet again, sparking fears that the
currency might be on the brink of a rout. It
was at this point that the central bank inter-
vened. It ordered state-owned banks to sell
dollars and buy yuan, propping up the exchange
rate at the very time that it was being accused
of devaluing it. This tug-of-war could play
out for weeks, with traders repeatedly testing
the limits of the People s Bank s tolerance for
This raises the question of what the central
bank is hoping to achieve. The most popular
explanation is that it wants to stimulate its
sluggish economy by cheapening its currency.
The depreciation, after all, came only a couple
of days after a surprisingly big drop in exports
However, the scale of the yuan s weakening
belies such a motive. The initial two per cent
devaluation undid only the previous 10 days
worth of appreciation in trade-weighted terms.
The yuan remains more than 10 per cent
stronger against the currencies of China s trad-
ing partners than it was a year ago.
Much bigger falls would be needed to make
a difference. Chinese officials have forsworn
a large one-time devaluation, however, believ-
ing that it would undermine faith in the yuan
and would do little to help the economy, since
it would only persuade other countries to let
their currencies weaken too.
Instead, another event seems the main trig-
ger for the central bank s actions. Later this
year the International Monetary Fund will
decide whether to include the yuan in the
select group of currencies it uses to calculate
the SDR, its unit of account. Inclusion would
amount to declaring the yuan a global reserve
currency. Only last week, however, the fund
hinted that the yuan still is too heavily con-
For the People s Bank, getting into the SDR
has never been about prestige alone. Rather,
it has been using this objective as a means to
push for reforms that would remove some of
the policy distortions still hobbling the econ-
omy. Introducing a truly floating exchange
rate is an essential part of its programme.
There is another complication, however.
Some US$250 billion of "hot money"---equiv-
alent to roughly 2.5 per cent of China s GDP,
an unprecedented amount---has left China
during the past year as the economy has
slowed. Strong inflows via the trade surplus
have allowed the People s Bank to absorb these
losses so far, but it is wary of doing anything
that might accelerate capital flight.
A sustained devaluation would do exactly
that, inviting speculators to short the yuan.
Hence the central bank s apparently contra-
dictory actions, in letting the yuan fall and
then in trying to make it stop.
As ever, China s willingness to trust market
forces extends only so far.
@2015 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
The battle of midpoint
...A step forward
A man walks past oversized images of the US dollar and the Chinese yuan in Hong Kong. Beijing
devalued the yuan this week, sparking a debate whether it could cause a regional currency war.
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