Monday, 17 August 2015

"More market-friendly"

One of the reasons given for the People's Bank of China's devaluation of the Yuan was to allow the currency to reach "more market-friendly" value, one closer to that at which offshore Yuan are being sold on the open market. After all, the devaluation wasn't achieved directly by fiat, but instead by allowing the trading price to vary within a 2% band and, officially, no longer holding the reference rate at a fixed value but instead using the previous-days closing price to decide the reference rate for the next day.

The problem is that PBOC seems intent on deciding what the previous day's reference rate is by intervening massively in the market in the final minutes of the trading day. That at least is what appears to be happening based on the volume of trading seen in the last few minutes of the trading day in the above graph.

Does this really matter? Well, to the extent that the PBOC loses credibility through apparent rigging of the market, and to the extent that this change was trumpeted as an example of the Chinese authorities "freeing" the Yuan, supposed boosting Beijing's case for the Yuan joining the major world currencies in the special drawing rights basket, yes it does matter.

[Click here to see the original graph on Neil Gough's Twitter feed] 


Ji Xiang said...

The Chinese state is simply incapable of giving up on its habit of heavy-handed interventionism, and really giving play to market forces. Not that that's necessarily a bad thing. Lasseiz-faire doesn't work for financial markets, as the 2008 crisis shows. Government interventions however should take place within a framework of properly defined and transparent rules, and in China they unfortunately don't.

Gilman Grundy said...

Agree that they're not capable of giving up on interventionism. The problem is in the case of China at some point you really have to doubt that, for example, the stock exchange index or internal currency values aren't primarily decided by government intervention. Artificially keeping over-valued companies at a high value, artificially keeping the value of the Yuan higher than the market thinks it should be, and doing so primarily because the government cannot allow them to fall because then they would lose face and for no other real reason is definitely worrying behaviour. At some point something has to give.

Ji Xiang said...

Are you sure they are not letting the Yuan fall in value just because they don't want to lose face? Aren't there better reasons?

In the past the Chinese government kept the Yuan undervalued for years. I don't think that was for the sake of not losing face.