Be careful what you wish for. After last year’s shock reform of the renminbi fixing mechanism in August, market participants were complaining about China’s lack of communication.
Well, China clearly took notice. Ever since that fiasco, Beijing has been very quick to respond whenever there are large movements in the renminbi or volatility-inducing events such as Brexit.
Having public bodies or officials make a statement can help soothe investor concerns, especially when markets are jittery. In fact, such actions should be applauded especially in China where the authorities aren’t really known for being the most open communicators, as GlobalRMB has pointed out in the past.
But as so often is the case, China and the market were at cross purposes.
While it’s commendable that the Chinese regulators are ready to comment on the renminbi and global volatility, they also need to understand an essential part of communication — the need to be informative.
For example, the People’s Bank of China put out a statement at the start of the month explaining that the renminbi is relatively stable against the basket of currencies it tracks, in spite of continued weakness against the dollar.
The latter, it was keen to stress, was mostly due to broad dollar strength against most EM currencies. Simply put, it wants to markets view the situation as a dollar strengthening story, not a RMB depreciating one.
There would be nothing wrong with this if it was a new line of guidance, but this is basically the same message it has been putting out since the start of the year. See here, here and here.
While it is true that perhaps the market should not be so fixated on the dollar’s movement, the greenback is kind of difficult to ignore thanks to its status as the most important currency in the world. Not to mention the fact that the renminbi has lost over 5% against the dollar since the start of the year.
The PBoC has yet to comment on the bout of RMB weakness that followed Trump’s victory in the US presidential election. But, even if it did, we can make an educated guess as to what the gist is likely to be.
As one economist pointed, China’s argument is basically that other than sustained depreciation, there is no basis for sustained depreciation.
This is an issue China needs to fix.
While it is true the market has asked for more communication, simply repeating the same message again and again is not good enough. What the market needs is a clearer sense of the policy direction in the messages it gives out. Now that would be something to talk about.