Is China’s faking it?

The statement from China’s central bank effectively announcing the end of yuan’s peg to the US dollar is so weak on specifics that analysts are wondering if the government is serious about allowing the yuan to appreciate —- or if this is just a deft sleight of hand to deflect international pressure.

Derek Scissors, research fellow at the Heritage Foundation, characterised the Chinese move as a “false reform” and a “fraudulent de-pegging” that would worsen global imbalances and lead to another global economic contraction. “The limits on daily movement in the yuan are unchanged,” he points out, and the current weakness of the euro will make China “reluctant to move off the dollar.”

What the US and the world need from China, adds Scissors, is “true progress towards an independent currency.” Only that, he says, will dial back imbalances, slow down accumulation of dollars in Beijing’s hands — and encouraging Chinese consumption in the long term.

Societe General economist Glenn Maguire makes a more nuanced point. Although the headlines suggest yuan appreciation is the automatic consequence of the announcement, the actual statement is considerably more nuanced on this front, he points out.

The People’s Bank of China concludes that despite this announcement of flexibility, the renminbi (RMB) will be “basically stable at an adaptive and equilibrium level” going forward. “The implied connotation of the word ‘equilibrium’ is clearly that China does not believe the yuan is significantly undervalued and that the yuan is trading close to what Beijing would assess as its fair value,” he adds.

But in Maguire’s assessment, China can now “credibly argue” that the mechanism is in place for continued rebalancing of the global economy and fewer distortions in global trade.
Others caution against excessive expectations of a sharp appreciation of the RMB against the US dollar —- and in fact even hold out the possibility of a depreciation.

“The PBoC was at pains to stress that moves from here on will likely be extremely moderate,” observes Standard Chartered economist Stephen Green. “Indeed, it is possible that it may take some time to discern a clear trend appreciation path of the renminbi against the US dollar, particularly if we see another bout of euro weakness against the dollar.”

The move may have grabbed headlines, but is unlikely to be followed up by significant appreciation, reckons RBS economist Ben Simpfendorfer. He points to the repeated references in the PBoC statement that the RMB’s value would be determined with a reference to a currency basket. “This will raise speculation of a depreciation of the yuan in the event of further strength in the US dollar,” but although this is theoretically possible, it would “weaken China’s repeated assertion” that keeping the yuan stable, even as other currencies depreciated, was important for global recovery.

Patrick Chovanec, associate professor at Beijing’s premier Tsinghua University, too reasons that while “there is obviously a political element to the timing of the announcement” —- ahead of next week’s G20 meeting —- it wasn’t “purely a political move”. 

“They’re obviously giving themselves some wiggle room, but I think China is serious about moving towards a more flexible exchange rate,” says Chovanec. “There are people within China, particularly in the central bank, who recognise that while a stronger RMB may mean short-term pain for some exporters, it also brings some very important long-term benefits to the Chinese economy and puts it on a much sounder plane going forward.”

But will the anodyne announcement, without a firm commitment or a timeline, ward off political pressure on China on the currency front? 

“If the yuan appreciation is deemed insufficient, there is still potential for trade tensions between the US and China, as several US Senators have made clear,” notes Standard Chartered analyst Callum Henderson.

UBS economist Wang Tao too feels that although the de-peg will put off some international pressure for now, whether or not such pressure returns would depend on how and how fast the yuan is allowed to adjust in the coming months. “At the same time, the government could face a backlash from domestic interest groups, particularly if both domestic growth and external demand slow later in the year.”