China’s Crisis of Miscommunication

SHANGHAI – At a forum in Canberra last year, Andrew Sheng quipped, “China is transparent, but only in the Chinese sense.” The statement provoked laughter among those who view China’s decision-making processes as opaque; but it was laughter born of the recognition that Sheng was right. In the run-up to a major policy decision in China, editorials by high-ranking authorities in major publications, as well as reports and communiqués from official forums and meetings, almost always provide clues about what will happen. You just have to know how to read them.

That is easier said than done, at least for foreign media, whose struggle to anticipate China’s policy moves has fueled much frustration – and even accusations that Chinese decision-making is secretive and unpredictable. This struggle is perhaps most apparent today in discussions about China’s exchange rate.

Many investors interpreted last August’s unexpected devaluation of the renminbi by 1.9% against the US dollar – the first decline following years of steady appreciation – as a last ditch effort by the People’s Bank of China (PBOC) to stave off an economic crash. They thus assumed that it was just the beginning of a protracted policy-induced depreciation. As a result, a wave of investors shorted the renminbi, fueled exchange-rate volatility and drove a sharp increase in capital outflows.

But China is not really on the verge of a currency crisis at all. Given that all of this activity is taking place in the offshore renminbi market, which is small in scale and has only limited connections to mainland China’s financial system – the result of China’s hesitancy about financial-market liberalization and capital-account convertibility – the situation remains controllable. Add to that China’s other strengths – annual GDP of over $10 trillion, a growth rate at least four percentage points higher than the global average, $3 trillion in foreign-exchange reserves, a savings rate of 40% of GDP, and a massive trade surplus – and an exchange-rate crisis seems highly unlikely.