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May 26, 2017

China Moves to Stabilize Currency, Retreating From Effort to Ease Control by Keith Bradsher. NYT | DealBook - May 26, 2017



nytimes.com
 
Keith Bradsher

When China’s stock market crashed in 2015 and when Beijing shocked the world by abruptly weakening its currency, a lot of money left China. In response, Beijing tightened its already considerable limits on money leaving the country.
When China’s stock market crashed in 2015 and when Beijing shocked the world by abruptly weakening its currency, a lot of money left China. In response, Beijing tightened its already considerable limits on money leaving the country.
HONG KONG — China has made a big show of gradually loosening its grip on the value of its currency, an effort meant to mollify critics like President Trump and experts both inside and outside the country who have long urged Beijing to let markets fix worsening financial problems in the world’s second-largest economy.
Late Friday afternoon, however, the Chinese government said, in effect, “never mind.”
Chinese officials said they were “considering” a change in their procedures that would reinforce their control of the currency, a turn of phrase that suggested the change had already been approved. The move will essentially bring more short-term stability to China’s financial system, already the subject of renewed focus after Moody’s Investors Service downgraded its credit rating on China’s bonds on Wednesday, citing the country’s mounting debt.
But longer term, the currency move signals that China is retreating from promises it made to the world in recent years that it would open up its financial system — and many economists say China needs to open up its financial system if it wants to continue to grow at a healthy, sustainable pace.

What Happened?

The China Foreign Exchange Trade System, which is controlled by the central bank, said it may change the way it sets a value each morning around which the country’s currency, the renminbi, is allowed to fluctuate through the day.
Every weekday, the government sets a benchmark value for the renminbi against what is supposed to be a basket of currencies, although the dollar dominates. The renminbi is then allowed to rise or fall in value only 2 percent from the benchmark during the day.
On Friday, the government said it was considering introducing a “countercyclical variable.” A better name might have been “fudge factor.” Basically it means that the government will no longer have to follow the previous day’s closing price in setting that day’s benchmark.

Why Change?

Starting in the summer of 2015, when China’s stock market crashed and when Beijing shocked the world by abruptly weakening its currency, a lot of money left China. Many in China did not want to hold stocks, bonds or other assets in a currency that was losing value in the broader financial world.
In response, Beijing tightened its already considerable limits on money leaving the country. Still, the potential for the currency to weaken further, amid doubts over China’s debt woes and slowing growth, has lingered over markets.
China’s financial regulators generally do not announce they are considering a shift in something as essential as the value of the currency unless they have already approved it, so the announcement on Friday was widely viewed as a signal to financial institutions, corporations and investors that change was on the way.

Who Wins and Who Loses?

The Chinese government contends that the winners are Chinese companies and households. Their assets are less likely to rise and fall quickly in value because of whatever is happening in financial markets. The Trump administration also will likely be pleased, because although it amounts to Chinese currency manipulation, it will keep China’s currency from weakening. If the renminbi weakened further, it could help Chinese exporters at the expense of American manufacturers.
But longer term, the change marks a big step back from China’s goal of turning the renminbi into an international currency like the dollar and the euro. Global investors want their currencies to move predictably along with financial markets, not based on decisions made behind closed doors in Beijing.
More broadly, it signals that China isn’t in a hurry to lower its financial barriers with the rest of the world. Those barriers create long-term imbalances that could rattle the global economy if they become severe enough.

Is China Breaking Commitments?

Yes. China loosened currency trading to woo the International Monetary Fund, which rewarded Beijing in the fall of 2015 by agreeing to add the renminbi to a group of currencies that includes the American dollar. The renminbi actually joined the I.M.F.’s elite club of currencies last fall, giving the Chinese currency more credibility.
But the I.M.F. is unlikely to get upset with China. Its general stance has been that China is now such a big part of the world economy, and particularly of global trade, that to ignore its currency would be a mistake.