After the PBoC combined a surprise devaluation of the RMB - ending a multi-year appreciation streak - with a reform of the daily fixing mechanism of the currency on August 11, 2015, markets spent months on edge, with analysts still scrambling to guess how low the RMB could fall and in particular, whether the PBoC had any more surprise moves up its sleeve.
But as the first anniversary of those events approached, a pleasant sense of calm seemed to have washed over the markets. The RMB had continued to fall, dropping 2.36% year-to-date against the US dollar, but the sense of panic seen earlier in the year seemed long forgotten.
Perhaps in relief that the outcome was not as bad as predicted in the first days after the devaluation, market commentary somewhat sugar-coated the anniversary, praising the PBoC’s regained credibility, as well as the market-oriented, transparent and rules-based nature of the new CNY fix.
It is true that after witnessing the self-made disaster that resulted from the August announcement, the PBoC has tried harder to engage in communication with the markets. The attempts have been clumsy at times, starting with semi-anonymous posts last December on the website of the China Foreign Exchange Trading System (CFETS) - which it owns - to introduce the new CFETS reference basket for the CNY fix.
But the move has worked, with observers praising PBoC's steady hand in navigating volatile global markets over the past 12 months as Federal Reserve rate hikes, Brexit, international terrorism and upcoming US presidential elections wreaked havoc.
Perhaps most importantly for PBoC, the new CNY fixing mechanism has gained some credibility in terms of how market-driven it appears to be.
Off the agenda
But look closer and it is clear there are still a host of problems that plague the renminbi.
While the PBoC has tried hard to promote the CFETS basket as the reference point for movement in the renminbi, it is hard to deny that markets are still stuck with the USD/CNY ticker as the most important trend indicator. In part, that is due to the fact that the methodology used to calculate the weights of the currencies in the CFETS basket is not transparent, as well as the fact that CFETS only publishes the basket's official performance on a weekly basis.
Another reason for caution is the PBoC's attitude when the market acts in a way it deems to be unfavourable to its own objectives. While interventions have been scaled back and communication has slightly improved, it has only been a few months since the PBoC engaged in a full-blown war in the offshore RMB (CNH) market. Upset by short bets against the RMB, it cut liquidity to the CNH market to the point of driving interbank rates to balloon, forcing short sellers to give up and adding a further blow to the already moribund dim sum bond market.
While markets have since recovered, that level of antagonism from China's central bank, combined with regulators' readiness to reinstate capital controls, seems to suggest that the current peace is due more to the fact that markets are behaving in a way that suits the PBoC, rather than a genuine change in mind-set.
And for all the perceived success of the new fix, the currency uncertainty has hurt the broader plan. Aside from the much-touted entry into the IMF special drawing rights (SDR) in October, the RMB internationalisation agenda has largely ground to a halt. For example, the RMB has dropped out of the top five of most used payment currencies and there have been painfully few new policy initiatives to promote the use of the currency offshore.
PBoC must surely be pleased by the cooing of some market voices. But the truth is that the to-do list remains as long as ever.
A positive first step would be to further reinforce communication with the markets. The establishment of regular press briefings would be a start as would be the release of minutes from the relevant PBoC meetings. This would help put a halt to the constant rumour mill about its policy decisions. It would also go a long way to dispel the ‘black box’ approach that permeates Chinese regulators and bring them closer to common practices in developed markets.
As for the currency, there are several things PBoC can do short of fully floating the currency. An expansion of the trading band would be welcome, as well as the further expansion of trading hours in the forex markets, which would facilitate the participation of approved international institutions in the onshore currency market, and likely reduce their reliance on the CNH.
Beijing loves to say it crosses the river by feeling the stones. Now it's time to show that it is not afraid of getting its feet wet.