China Confronts the Market
CAMBRIDGE – China’s current economic woes have largely been viewed through a single lens: the government’s failure to let the market operate. But that perspective has led foreign observers to misinterpret some of this year’s most important developments in the foreign-exchange and stock markets.
To be sure, Chinese authorities do intervene strongly in various ways. From 2004 to 2013, the People’s Bank of China (PBOC) bought trillions of dollars in foreign-exchange reserves, thereby preventing the renminbi from appreciating as much as it would have had it floated freely. More recently, the authorities have been deploying every piece of policy artillery they can muster in a vain attempt to moderate this summer’s plunge in equity prices.
But some important developments that foreigners decry as the result of government intervention are in fact the opposite. Exhibit A is the August 11 devaluation of the renminbi against the dollar – a move that invoked for US politicians the old adage, “Be careful what you wish for.” The devaluation – by a mere 3%, it should be noted – reflected a change in PBOC policy intended to give the market more influence over the exchange rate. Previously, the PBOC allowed the renminbi’s value to fluctuate each day within a 2% band, but did not routinely allow the movements to cumulate from one day to the next. Now, each day’s closing exchange rate will influence the following day’s rate, implying adjustment toward market levels.