The sudden devaluation of the yuan by 1.9 per cent on August 11 last year, the by-product of China’s well-intended tweak of its yuan-exchange rate system, roiled markets across the globe and fanned fears that something very bad might be happening in the world’s No 2 economy.
The adjustment came without warning and amid an unfolding stock market rout, a persistent economic slowdown and increasing worries about the health of the mainland’s financial system and the government’s ability to manage the economy and markets.
One year later and the yuan is still weakening against the dollar, having lost about 7 per cent. But concerns that investors might be caught off guard again have eased. Beijing has made it clear there would be no more “one-offs” further down the road. China’s foreign exchange reserves – a barometer to measure confidence in the yuan – have largely stabilised in recent months after serious bleeding since late last year.
“It seems as though they have learned an important lesson … to act gradually under the cloak of market forces rather than falling back on blunt administrative changes to the exchange rate,” said Alan Wheatley, an associate fellow of international economics at the British think tank Chatham House. “Beijing has engineered, or permitted, a gradual depreciation of the yuan [in 2016] that is much greater than the August 2015 devaluation, and no one seems to care,” Wheatley said.
The central bank appears determined to avoid a repeat of last year’s drama, even though doing so can sometimes mean sacrificing the independence of domestic monetary policy and offshore yuan market growth.
In the latest monetary policy report published on August 5, the People’s Bank of China said it could not afford to cut the deposit reserve ratio, the share of deposits a bank is required to put at the central bank, because such cuts might cause “growing pressure on the currency to depreciate and falling foreign exchange reserves”. But many economists are urging the central bank to lower the ratio as a reasonable way to boost liquidity, and in turn, economic growth.
At the same time, the bank is trying to persuade investors and observers to look at the value of yuan more from the perspective of a basket of currencies instead of the greenback. Every month, the bank publishes a statement on its website that claims the yuan exchange rate is “basically stable”.
“By moving slowly and shifting the focus from the US dollar exchange rate to a basket reference rate, China managed to stabilise sentiment,” said Stephen Jen, chief executive of Eurizon SLJ Capital, a London-based investment firm. “Even though renminbi is weaker, the movement has had virtually no spillover effects on the rest of the world.”
China had also learned a lesson about the power of words, according to Xu Hongcai, an economist at the China Centre for International Economic Exchanges, a government-backed think tank in Beijing.
“The lessons from the stock market rout and the August 11 yuan mechanism reform are dear, and one of them is about communication,” Xu said. “You can’t leave the market guessing. You have to let the market know what you are doing.”
China appears to have beefed up its efforts to communicate its intentions with the yuan and the economy. Zhou Xiaochuan, the central bank governor, broke months of silence with a lengthy interview with Caixin magazine, followed by repeated assurance from officials at the meeting of G20 finance ministers and central bankers in Shanghai, as well as at the National People’s Congress in March, that the situation was under control.
The central bank has become more aggressive in controlling the narrative of China’s yuan policy. After Reuters reported in June that Beijing would allow the yuan to fall as low as 6.8 to the US dollar this year, the central bank responded with a statement “strongly condemning” the report, without naming the news agency specifically. It said such media reports were misleading public opinion and distorting “normal operation order” of the foreign exchange market.
In late May, the bank also attacked a report carried by The Wall Street Journal, without naming the media institution, about China’s yuan reform commitment.