Renminbi fall: The postman rings twice

How should Europe interpret the rapid devaluation of the renminbi?

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On Tuesday, the Chinese central bank did what every advocate for the internationalisation of the renminbi has been asking for. They in effect widened – suddenly – the daily fluctuation band for the currency, moving the daily fixing by 1.9 percent from the previous close. Given that the daily fluctuation already allowed since 2014 is 2 percent in either direction that meant, in effect, a possible move of 3.9 percent in one day.

So far so good. A key condition for the renminbi to become one of the IMF’s reserve currencies is to increase its flexibility, moving in steps from a crawling or “dirty” peg to a floating exchange rate.

The trouble is, the move was down, not up, and is surrounded by contradictions.

China has found a way to answer external requests on a more flexible currency while actually increasing its trade competitivity. And, importantly, while the People’s Bank of China (PBOC) said on Tuesday that this lower fix was a “one-time” move, in order to assuage fears that it was starting a competitive devaluation, on Wednesday, it did it again, this time lowering the daily fixing rate by 1.6 percent. These are the two biggest currency price cuts since China gave up its devaluation policies in 2005.

When a “one-time move” is repeated, no less than a day later, it is no longer an attempt to surprise markets, but instead a move to counter the prevailing market trend.

On Tuesday, most sympathetic observers noted that what mattered was that China was in effect increasing margins of fluctuation – possibly pre-empting speculation on a possible renminbi devaluation. Of course, there have long been expectations of a revaluation of the Chinese currency, though not a devaluation. But China’s partners and competitors may wish they hadn’t asked for more flexibility if they had known that this would translates into a lower, not higher, renminbi. But recent economic trends in China – lower growth, a stock market fall and a recent and sudden contraction of exports – did increase the likelihood of a lower renminbi. China’s export engine needs to be fired up in order to rekindle economic growth

Is the People’s Bank cleverly moving one step ahead of speculation, or does it just want a lower renminbi for mercantilist reasons? By Wednesday the answer was clear. In spite of the previous day announcement, the renminbi forex rate had not exceeded the fall in the new fix (although overseas forex markets did move further down). This means currency traders – potential speculators if you will – had actually not used all the new margin for a lower exchange rate. By moving again on Wednesday, the PBOC has shown that is not just preempting speculation.

It seems most likely that, frustrated that the market had actually not taken their cue and moved the currency down more significantly, China’s financial authorities moved again. They forced the renminbi down in what is clearly a policy statement, not just an effort to appear unpredictable and warn away speculators. 

That this policy is cloaked in the mantle of more flexibility – an IMF mantra and a requirement for internationalisation of the yuan – matters less than the obvious return to a mercantilist policy.  This has been heralded by other moves recently, including an active rise in export subsidies for select sectors. Few people have noted that the huge disbursements planned in the course of the Silk Road or One Belt, One Road international projects are actually also a way to spend down some of the huge currency reserves China has amassed – and therefore to keep the currency low and China’s export engine at full blast. The tap can be turned on or off at will, and it has the huge advantage over currency sterilisation as China practiced it formerly that it does not result immediately in a flood of domestic renminbi creation and the resulting speculative bubbles.

Overall, two conclusions jump out. First, China has a talent for cloaking its monetary policy in internationally acceptable language – describing a devaluation move as an increase in flexibility is a clever act. Second, it will not let the market dictate exchange rates or anything approaching, but instead conceives of its currency as a macro-economic tool to maximise competitivity or counter an economic slowdown.

In this respect, nothing has changed, and we can indeed expect a time ahead when the redback is “our (China’s) currency and your problem”. 

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


ECFR Alumni · Director, Asia and China Programme
Senior Policy Fellow

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