Garden in China

China’s Transparency Problem

For China, coordinating short-term policies aimed at stabilizing markets with long-term changes to the industrial structure has been no easy feat. One thing is clear: effective communication with market participants and real-economy players is crucial to market credibility and stability.

HONG KONG – The Chinese economy has caught a surprisingly severe cold this winter – a cold so bad that almost all global markets are sneezing. During the first two weeks of 2016, the Shanghai Composite Index fell 18%. On January 15, the index closed at 2,901 – very close to the trough of last summer’s stock-market crash. Foreign analysts almost uniformly predict another market crash or even a hard landing. With oil prices dipping below $28 per barrel, the specter of a global economic pandemic has appeared.

China’s New Year financial-market shock has been attributed to several causes, primarily related to policy transparency and clarity. One was the reversal of China’s attempt to install a stock-market “circuit breaker,” which, far from tempering volatility, spurred a new wave of selloffs. The other – arguably more serious – problem was market confusion about the direction of the renminbi exchange rate, following a gradual but constant ten-day depreciation against the US dollar that fueled capital outflows, until the People’s Bank of China (PBOC) intervened.

According to the PBOC, the confusion arose from a technical change in the process of setting the renminbi exchange rate, with the common reference rate against the US dollar replaced by a rate established on the basis of an undisclosed basket of key international currencies. This reform may be intended to boost the renminbi’s stability; but it is not good for markets, which prefer stability against the dollar to the uncertainty of a managed float.

To continue reading, please log in or enter your email address.

To continue reading, please log in or register now. After entering your email, you'll have access to two free articles every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you are agreeing to our Terms and Conditions.

Log in

http://prosyn.org/mJQ72Hk;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.