The fact that it rose 2.6% in January alone may have prompted the timing of the recent adjustments, but we should not lose sight of the bigger reform agenda.
China has shown little appetite in the past for currency manipulation to stimulate exports and has instead chosen to demonstrate exchange rate stability as a mechanism for attracting long-term investment flows. Financial reform in China is an integral part of economic reform and the moves this week to manage the renminbi from the top of its range to the bottom is part of a process to make it a two-way rather than a one-way bet.
The foreign exchange regulator also announced a widening of the bands later this year, all part of the long-term plan to make the renminbi fully convertible.
The moves this week are akin to the Fed’s issue with tapering last year – it knows that the financial markets like nothing better than a carry trade, and the more the carry trade appears to work, the more leverage goes into it, making the financial system inherently unstable. The job of a sensible central banker therefore is not so much to take away the proverbial punchbowl as to suggest that someone might have dropped something unpleasant into it.
So this is not so much to punish speculators as to let air out of a bubble that would otherwise inevitably build around a one-way bet.
While the People’s Bank of China focused on monetary policy and building a financial service infrastructure for China, the G20 finance ministers meeting in Australia all agreed that they would like to have growth 2% higher than it otherwise would be. Why not 3%? After all if you can simply wish for growth, why stop at 2%.
Apologies for cynicism, but unless such talking shops are accompanied by positive action on things like trade – which have an unequivocal economic benefit – rather than talking about governments creating jobs by a series of tax-and-spend policies wrapped up in ever increasing bureaucracy they will not only fail to achieve their targets, they will continue to ensure that the growth is lower, not higher than it otherwise would be without their help.
The key point about China is that its reforms are about less state interference, not more and allowing markets to set prices – indeed a proper market price for credit will eliminate much of the need for a shadow banking system.
