In a few decades, China’s rapid growth has taken the economy from being smaller than an average European country to one widely predicted to soon overtake the US. A generation of Western officials reported that the most important event of their lives was China’s rise to stardom. This has not translated into good options to stop the yuan’s current slide. Weakness towards the raging greenback is an almost universal condition. There is no indication that Beijing expects, let alone desires, a big rally against the dollar. The yuan fell to a 14-year low last week. It fell about 6% in the third quarter, a slightly smaller decline than the yen, the Thai baht and the Taiwanese and Australian dollars. (South Korea’s won was Asia’s worst performer, down about 9%).
Nor was the People’s Bank of China’s response a million miles from its peers across the region. The specific tools used to tackle transparency may vary, but the approach and goals look like a standard central bank playbook: jawbone, breaking the rules here, some incremental changes there. The aim is to cushion the fall in the currency, give local businesses time to adjust and try to ensure that the fall is not so sharp as to tear apart the fabric of commercial life. It is only natural that the decline of the yuan reflects the current economic situation. China’s growth this year has been relatively anemic, and Beijing is cautiously stimulating the economy, including some modest cuts in interest rates and reserve requirements for lenders. Inflation is well below US levels, where rates are rising rapidly – as they are in almost every other major economy.
Beijing is leaning against the yuan’s downward trajectory. For a month, the central bank has used the daily benchmark rate, or fix, its most widely used tool to guide market expectations, to signal its distaste for bearish bets. Officials cut the amount of foreign currency deposits banks must hold as reserves and made it more expensive to bet against the yuan through derivatives. Late on Wednesday, the PBOC warned that “the principle” of the repair must be protected. Ominous words in a one-party state that abhors instability.
The invocation of financial stability under siege was enough to give the yuan its first gain in nine days on Thursday — wi
a huge help from powers far beyond China. The Bank of England’s foray into markets to buy British debt in a bid to stem the collapse of pension funds boosted markets worldwide. China’s tutorial came hours before the dramatic rescue. Good luck or good timing, more work awaits Beijing. While the BOE capped some volatility, its purchases will stop in mid-October.
The past few weeks have seen the Japanese Finance Ministry move from verbal tests to actual intervention on the yen market, the first such step in a generation. The Bank of Japan is estimated to have spent more on the afternoon of September 22 to prop up the yen than in all of 1998, the last time it resorted to such purchases. South Korea pledged on Wednesday to buy more of its own debt. Indonesia and India have also stepped in directly to support their currencies. What’s driving them south is the aggressive tightening by the Fed that has weakened the greenback. Local idiosyncrasies may amplify or moderate the fluctuations. it is not the underlying driver. (The proximity of a crucial Communist Party gathering this month may add an extra layer of concern to the PBOC. The conference is expected to hand President Xi Jinping a third five-year term.) Domestic economic headaches include a youth unemployment rate that approached 20% in July — even with a shrinking workforce. Home prices are falling and lenders are facing boycotts on mortgage payments from homebuyers waiting for cash-strapped developers to complete backlogs. The yuan’s softness limits Beijing’s options for promoting recovery from the economic slowdown. China cut interest rates modestly in September and, before the global market turmoil of the past 10 days, was expected to do so again soon. The risk now is that reductions in borrowing costs work against efforts to manage the yuan’s decline. (Their effectiveness would be questionable, in any case, given the weight on growth from the Covid-zero strategy and the property crash.)
The days of market forces freezing the forex are over. Beijing ended a tough relationship with the dollar in 2005, and the size of the global foreign exchange market has swelled to $6.6 trillion a day, according to the Bank for International Settlements. The yuan now moves up or down in response to some of the same forces that drive markets in each nation: the relative performance of the economy in a global context of growth, inflation, interest rates and capital flows. When the peg ended 17 years ago, forecasters climbed over each other to project the yuan’s appreciation. Little attention was paid to what a sharp slide would look like and what might cause it. The rise of China is often said to have reshaped capitalism. In monetary matters, the country seems to be affected by very conventional and traditional influences. Almost normal. More from Bloomberg Opinion:
• Yuan transparency is too much for Beijing to stop: Daniel Moss
• A surprise winner as emerging markets collapse: Shuli Ren
• Gold market carnage prompts dangerous BOE reversal: Mark Gilbert
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ executive finance editor.
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