Currencies, Emerging Markets

China’s Central Bank Can’t Leave The Currency Control Lever Alone

By Tadanori Yoshida, Nikkei Asian Review

The People's Bank of China (PBOC) in Beijing, capital of China. File photo courtesy of PBOC.

The People’s Bank of China (PBOC) in Beijing, capital of China. File photo courtesy of PBOC.

Beijing desperately wants to keep the yuan from depreciating further while also internationalizing the currency, but its actions don’t appear to help achieve either end.

The State Administration of Foreign Exchange summoned currency market officials from commercial banks about a month ago, telling them not to give comments to customers that might sway rates for the yuan.

It is quite routine for a bank to provide an outlook on exchange rates to customers. But the agency feared that bank projections of a weaker yuan would encourage selling of the currency, exacerbating depreciation. The agency named and criticized banks home to a high number of yuan-selling trades.

The agency did not place any restrictions on bank forecasts about dollar-euro, dollar-yen and other non-yuan pairs, indicating that its sole goal was to prevent the Chinese currency from coming under further weakening pressure in the market.

Surprised by the wide-reaching repercussions of its Aug. 11 effective devaluation of the yuan against the dollar, the People’s Bank of China held a news conference two days later explaining its objective. But judging by what has happened since, its expectations did not come to fruition.

At the conference, the central bank stressed that the aim of the devaluation was to narrow the spread between the standard value of the yuan that it sets every day and the currency’s market value. The move helped address the matter in three days, the bank even explained.

But the devaluation further accelerated capital outflow overseas, increasing depreciation pressure on the yuan further. The rattled bank kept intervening in the market, buying the local currency and selling the greenback, and this led to the steepest-ever decline in China’s foreign-exchange reserves in August. Despite its stated intention, the central bank no longer can afford to let the market determine the direction of rates.

Read more from the Nikkei Asian Review

Discussion

One thought on “China’s Central Bank Can’t Leave The Currency Control Lever Alone

  1. Reblogged this on World Peace Forum.

    Like

    Posted by daveyone1 | October 5, 2015, 11:07 am

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