In China, Shaking Up Currency’s Strength

Published on Author bloomer



For the past nine years, financial government workers in Shanghai have essentially arbitrarily dictated what their country’s currency is worth that day in comparison to the USD. For most days, the staff for China’s Foreign Exchange Trade System assigned a value to the Renminbi that was stronger than the previous day. Because of this, the Renminbi today has increased by approximately 25% since July of 2005. China’s currency used to be a “fixed peg to the dollar” which provided a more conventional exchange rate. Until now, the Renminbi’s “steady, crawling appreciation” could have been falsely increasing due to the arbitrary nature of it valuation.

But this year the Renminbi has weakened 1.6% against the dollar. And this past Saturday, the People’s Bank of China said that “beginning on Monday, it would allow the currency to climb or fall as much as 2% per day against the dollar, compared to 1% percent previously”. According to Tan Yaling, president of the China Forex Investment Research Institute, widening the trading band “will further drive away speculators betting on a one-way appreciation of the Chinese yuan…thanks to the possible bigger and more frequent exchange rate fluctuations.”

This newly discovered uncertainty of China’s currency is simply one area where, despite “recent economic data suggesting that growth is decelerating to it slowest pace in over a decade, China is pushing ahead with a campaign of wide-ranging financial overhauls.” If successfully executed, these overhauls have the potential to redefine the nation’s state-driven growth model and “to reverberate in economies far beyond China’s borders.

To me, this announcement is shocking. The fact that China has done, what boils down to falsely/artificially ensuring at least minimal yearly economic growth, is appalling and should probably have been illegal. What’s even more shocking are the implications. This news poses substantial risk for companies and countries that do business with China in that it will most likely significantly reduce the country’s future foreign investments. To put it quite mildly, Australia, for example, a nation whose economy is almost exclusively dependent upon China’s economic success, now faces unprecedented financial risk.

7 Responses to In China, Shaking Up Currency’s Strength

  1. Maybe, the reason for China’s arbitrary currency valuation was simply to inflate the value of the Renminbi only to the extent that it would be more competitive with the USD. This could explain the timing of the recent news, now that China has proven itself as one of the world’s chief economic powers. From a strategic standpoint, this could, in the short-run, give China an advantage in that people would be more likely to open accounts in Chinese banks, giving these banks more leverage than they would have without employing this tactic. Now that “the cat is out of the bag” analysts (and myself) will be most curious as to how world markets will respond.

    • Keep “strong” and “weak” straight – to make exports easier requires a weaker RMB, what has happened until now is a stronger RMB!!!

    • That the government has pegged the RMB is clear – remember that I showed you what the pattern of intraday trading prices, bouncing between the day’s max and min limits, whereas other exchange rates (I used the Japanese yen – US$) bounce around in a random walk, without pattern. But was it pegged too strong? too weak? The arguments for the latter are that China ran trade surpluses. The argument that it’s too strong is that (as per my comment on the earlier post) Chinese would like to hold more foreign assets to diversify their assets. Since the limit was raised, the RMB has depreciated, suggesting the latter concept may be the more important / relevant one.

  2. This is good news for everyone, not least the Chinese people. Allowing market fluctuations in the CNY will allow China’s trade surplus to rebalance. This means higher wages, fewer external costs, and less overdevelopment. These wide-ranging overhauls to the banking system, if accompanied with good reforms in other areas and a new emissions tax, could pave the way for sustainable–and attractive–growth.