Zhang Jun writes \u00a0At a forum in Canberra last year,\u00a0Andrew Sheng\u00a0quipped, \u201cChina is transparent, but only in the Chinese sense.\u201d The statement provoked laughter among those who view China\u2019s decision-making processes as\u00a0opaque; but it was laughter born of the recognition that Sheng was right. In the run-up to a major policy decision in China, editorials by high-ranking authorities in major publications, as well as reports and communiqu\u00e9s from official forums and meetings, almost always provide clues about what will happen. You just have to know how to read them.<\/p>\n
Many interpreted last August\u00a0as a last ditch effort by the People\u2019s Bank of China (PBOC) to stave off an economic crash. \u00a0But China is not really on the verge of a currency crisis at all. Given that all of this activity is taking place in the offshore renminbi market, which is small in scale and has only limited connections to mainland China\u2019s financial system \u2013 the result of China\u2019s hesitancy about financial-market liberalization and capital-account convertibility \u2013 the situation remains controllable. Add to that China\u2019s other strengths \u2013 annual GDP of over $10 trillion, a growth rate at least four percentage points higher than the global average, $3 trillion in foreign-exchange reserves, a savings rate of 40% of GDP, and a massive trade surplus \u2013 and an exchange-rate crisis seems highly unlikely.<\/p>\n
But that does not mean that there are no risks. On the contrary, China has a strong interest in curbing the volatility \u2013 and, given China\u2019s centrality to the global economy, so does the rest of the world. The key will be to get markets and policymakers on the same page.<\/p>\n
Chinese policymakers have shown a clear commitment to minimizing government intervention and promoting a market-oriented approach for setting interest and exchange rates. And the authorities have made significant progress toward this end.<\/p>\n
In fact, the devaluation last August was accompanied by the announcement of a more market-oriented mechanism for setting the renminbi\u2019s exchange rate in the interbank market, with the daily fixing rate based on the previous day\u2019s closing price. That move, was a prerequisite for the addition of the renminbi to the basket of currencies that determine the value of the International Monetary Fund\u2019s reserve asset, the Special Drawing Right.<\/p>\n
But even when China attempted to create a more reliably market-based system, investors\u2019 responses were skewed, with unfounded expectations of a substantial and consistent devaluation fueling speculation in international markets. The subsequent attempt by China\u2019s State Administration of Foreign Exchange to stabilize expectations by declaring that the renminbi would be valued against an undisclosed basket of currencies, instead of just the US dollar, failed to convince them. Short trades continued to rage offshore, putting the renminbi under increasing pressure.<\/p>\n
The PBOC has been working vigorously to prevent further misunderstandings by designing policies that will safeguard exchange-rate stability, while taking care not to transmit any signal that monetary easing is in the cards.<\/p>\n
The\u00a0PBOC clearly remains committed to stabilizing the exchange rate, while advancing its market-oriented goals.<\/p>\n
China\u2019s leaders have plenty of challenges ahead, and improved communication with markets could help to overcome them. Fortunately, it seems that China\u2019s leaders recognize this imperative, and are working to meet it.<\/p>\n
Zhang Jun writes \u00a0At a forum in Canberra last year,\u00a0Andrew Sheng\u00a0quipped, \u201cChina is transparent, but only in the Chinese sense.\u201d The statement provoked laughter among those who view China\u2019s decision-making processes as\u00a0opaque; but it was laughter born of the recognition … Continue reading ![\"China's](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/12\/Chinas-Reform.jpg\")
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