China has made a big show of gradually loosening its grip on the value of its currency, an effort meant to mollify critics like President Trump and experts who have long urged Beijing to let markets fix financial problems in the world’s second-largest economy.
Late Friday afternoon, however, the Chinese government said, in effect, “never mind.”
Chinese officials said they were “considering” a change in their procedures that would reinforce their control of the currency — a kind of statement usually indicating a policy had already been approved. The move would essentially bring more short-term stability to China’s financial system, already the subject of renewed focus after Moody’s Investors Service downgraded its credit rating on China’s bonds on Wednesday, citing the country’s mounting debt.
But a move with the currency, the renminbi, would signal that China was retreating from promises it made to the world in recent years to open up its financial system — and many economists say China needs to do that if it wants to continue to grow at a healthy, sustainable pace.
Introducing a ‘Fudge Factor’
The China Foreign Exchange Trade System, which is controlled by the central bank, said it might change the way it sets a value each morning around which the country’s currency is allowed to fluctuate through the day.
Every weekday, the government sets a benchmark value for the renminbi against what is supposed to be a basket of currencies, although the dollar dominates. The renminbi is then allowed to rise or fall in value only 2 percent from the benchmark during the day. That benchmark is supposed to be based on the currency’s value the day before.
On Friday, the government said it was considering introducing a “countercyclical variable.” A better name might be “fudge factor.” It means that the government would no longer have to follow the previous day’s closing price in setting that day’s benchmark.
China does not disclose much about the inner workings of its currency, but some variation of the policy may already be in place. The currency has already settled into trading range at or just below 6.9 to the United States dollar, just below the psychologically important level of 7 to the dollar.
Many Wall Street analysts say the currency should be a bit weaker, though they disagree on the degree. More broadly, many say the renminbi is now closer to its true value than it was in earlier years, when Beijing faced deep pressure from the United States and others to more fairly value the currency.
Market Skepticism Lingers
Starting in the summer of 2015, when China’s stock market crashed and when Beijing shocked the world by abruptly weakening its currency, a lot of money left China. Many in China did not want to hold stocks, bonds or other assets in a currency that was losing value in the broader financial world.
In response, Beijing tightened its already considerable limits on money leaving the country. Still, the potential for the currency to weaken further, amid doubts over China’s debt woes and slowing growth, has lingered over markets.
China’s financial regulators generally do not announce they are considering a shift in something as essential as the value of the currency unless they have already approved it, so the announcement on Friday was widely viewed as a signal to financial institutions, corporations and investors that change was on the way.
For economists and investors, the change would probably bring stability to the currency, at least in the short term. Among the losers, assuming China kept the currency at current rates, would be Chinese manufacturers, who benefit in foreign markets when the currency weakens.
Boon for China, and Maybe Trump
The Chinese government contended that the winners would be Chinese companies and households. Their assets are less likely to rise and fall quickly with ups and downs in financial markets.
But the change to its currency rules would help Beijing too. Since 2015, when the money flight began, China dipped into its vast foreign-exchange hoard to support the currency, reducing that pile of money by an astonishing $1 trillion. That is politically costly for Chinese officials, who once promoted the country’s foreign exchange reserves as the “blood and sweat” of its laborers.
The currency rule change could also reassure the public that the government was firmly in control. In recent weeks, Chinese efforts to rein in some frothy lending caused turbulence in China’s financial markets. President Xi Jinping recently urged the country’s financial regulators to focus on stability.
The country’s political leaders are scheduled to gather in late autumn in Beijing for a Communist Party Congress, an event held only once every five years to review and to some extent adjust the party’s leadership. Few in Beijing want turbulence in the economy or financial markets in the months leading up to the event.
The Trump administration would most likely also be pleased, because although the rule change would amount to Chinese currency manipulation, it would keep China’s currency from weakening. If the renminbi weakened further, it could help Chinese exporters at the expense of American manufacturers.
But the change marks a big step back from China’s goal of turning the renminbi into an international currency like the dollar and the euro. Global investors want their currencies to move predictably along with financial markets, not based on decisions made behind closed doors.
More broadly, it signals that China is not in a hurry to lower its financial barriers with the rest of the world. Those barriers create long-term imbalances that could rattle the global economy if they became severe enough.
Bending a Promise
China loosened currency trading to woo the International Monetary Fund, which rewarded Beijing in the fall of 2015 by agreeing to add the renminbi to a group of global reserve currencies that includes the American dollar. The renminbi actually joined the monetary fund’s elite club of currencies last fall, giving the Chinese currency more credibility.
But the fund most likely would not publicly chastise China if it changed its currency rules. The organization’s general stance has been that China is now such a large player in the world economy, and particularly in global trade, that to ignore its currency would be a mistake.