China’s Currency Regime
The current wisdom railing against Beijing is that the Central Bank would run out of reserves in early 2016 forcing China to depreciate its currency again! This insight continues to be extremely shortsighted and typical of the criticism dominating television; the regime in Beijing saw it differently, fighting back on multiple fronts, intervening domestically while tightening domestic capital controls. As of this writing, the regime is winning. Capital outflows have slowed considerably bringing needed currency stability.
The largest part of this equation isn’t seen; its the Federal Reserve and its unwillingness to permit normalcy in its governing scheme to unlink, uncouple its extremely accommodative stance to the necessity of permitting the market to set interest rates. As the Fed turned dovish, Beijing was relieved.
Since June, Chinese central bankers have set nominal rates at its weakest level against the U.S. dollar in more than five years. Beijing continues to watch trends in capital outflows hoping the worst is over… Still, China today has weathered a crisis that most thought would sink the regime. Capital controls remain if only to act as a bulwark against speculators in Hong Kong, but its property market and debt cycle is damaging.
While the Central Bank in Beijing has dumped last August’s exchange rate mechanism, it still sets the yuan on a band of 2% based on previous day rates relative to a basket of currencies, if continued, Beijing is pursuing a move to dethrone the dollar by permitting the market a greater role in pricing Beijing’s currency.
Two points to consider: like all authoritarian regimes, Beijing influences the previous day closing rate by intervention while managing state-owned bank portfolios dollar position; effectively shaping the options the market denotes. This scheme is to keep the yuan priced low, pegged either to the dollar or the basket of currencies.
The managed economy means this: the Chinese don’t want a John B. Taylor, an Allan Meltzer or a Paul Volcker anywhere near the regime. That’s damaging to the future of the Chinese political economy, if only to acknowledge that politics is applied ethics and the Chinese working citizen deserves better than the regime is giving them.
Originally posted on William Holland’s website.