Yuan makes its first mar­ket move

The Pak Banker - - OPINION - Jayan Jose Thomas

China's de­sire to be a world eco­nomic leader is le­git­i­mate, but too tight an em­brace of global fi­nance could kill the very sta­bil­ity that has marked the coun­try's rapid as­cent China sprung a sur­prise on world mar­kets last week. The Chi­nese cur­rency ren­minbi (less for­mally known as yuan) lost its value against the U.S. dol­lar by nearly 3 per cent be­tween Au­gust 11 and 13. This was its sharpest weekly fall in over two decades. With the de­val­u­a­tion, China's man­u­fac­tured prod­ucts are go­ing to get cheaper. In other words, with one U.S. dol­lar - whose value rel­a­tive to ren­minbi in­creased from 6.2 to 6.4 fol­low­ing de­val­u­a­tion - you can now pur­chase more Chi­nese goods than be­fore.

The de­val­u­a­tion an­nounce­ment came within days of China's ex­port fig­ures for July record­ing a neg­a­tive growth, ow­ing mainly to the slow pickup in de­mand from de­vel­oped-coun­try mar­kets. Nat­u­rally enough, one in­ter­pre­ta­tion was that the de­val­u­a­tion was an at­tempt by the Chi­nese author­i­ties to boost ex­port de­mand for its man­u­fac­tured goods. Some com­men­ta­tors ar­gued that the Chi­nese ac­tion might trig­ger a new global cur­rency war - where other coun­tries too de­value their cur­ren­cies to com­pete with China - as had hap­pened dur­ing the Great De­pres­sion of the 1930s.

The Peo­ple's Bank of China (PBOC), China's cen­tral bank, soon stepped in to clar­ify. It said that the de­val­u­a­tion marked the tran­si­tion to a flex­i­ble, more mar­ket-based sys­tem of de­ter­min­ing China's ex­change rates. In con­trast, the sys­tem that ex­isted un­til now was one in which the value of the Chi­nese cur­rency (es­pe­cially in re­la­tion to the U.S. dol­lar) had largely been fixed by the gov­ern­ment.

If PBOC's claims are true, it is likely to be a com­po­nent of a larger, na­tional strat­egy to in­ter­na­tion­alise the ren­minbi. China wants to see the ren­minbi emerge as a cur­rency for in­ter­na­tional trade and fi­nance, like the dol­lar. It also plans to build Shang­hai into a global fi­nan­cial cen­tre, ri­valling New York. As a pre­lim­i­nary step, China is try­ing to get the ren­minbi in­cluded in the bas­ket of cur­ren­cies in In­ter­na­tional Mon­e­tary Fund (IMF)'s Spe­cial Draw­ing Rights (SDRs). The IMF has set a pre­con­di­tion that China should re­move re­stric­tions on for­eign cap­i­tal flows and shift to a flex­i­ble ex­change rate sys­tem. Ex­pect­edly, the IMF wel­comed PBOC's an­nounce­ment. It is to be noted that China has had strict con­trols on for­eign cap­i­tal move­ments across its borders, at least un­til re­cently.

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