There can be little doubt that this year has been a crucial one for the development of the renminbi, with plenty of tinkering by the government. The People’s Bank of China added a countercyclical factor to its daily fixing mechanism in late May, a move that was widely seen as a backwards step by analysts who have long been waiting for the market to decide the exchange rate.
On September 11, it scrapped reserve requirements for banks settling FX forwards. The relaxation followed the imposition of those same requirements just over two years earlier, after the August 2015 reform of the daily fixing that ushered in prolonged weakness in the RMB exchange rate against the dollar.
The consensus on the reserve requirement change was that the authorities had grown afraid the RMB was rising too fast – it had appreciated 7% between the start of the year and September 8. But when the currency started deprecating after the change, dropping 2.4% by the end of September, some analysts started to worry the regulator had overshot.
There is a narrative about Chinese intervention in the currency market that has gained stock this year. It is narrative that has arguably been true for much of the last few decades, but now needs an update. The regulators, the story goes, are obsessively managing the exchange rate. They were happy to keep tighter controls during a surge in the currency, but eventually lost their nerve. They then helped push the currency down, and will soon reverse track again if things get out of hand.
In short: China’s tight grip on the FX market continues. But this story doesn’t add up.
It is certainly true that stability remains the watch-word for China in 2017, especially in the run-up to the 19th National Congress of the Communist Party of China that begins on Wednesday. But from their words and their actions, the monetary authorities have been clear about their attempts to allow the market more of a price-setting role.
That was evident in the August 2015 reforms, when the authorities talked about increasing the ability of the RMB to be determined by markets and to move flexibly up or down against other currencies.
They have stuck to this line. Speaking at a conference in March this year, PBoC officials promised “further deepening reform of [the] RMB exchange rate formation mechanism and stably propelling RMB capital account convertibility”. This is hardly a catchy turn of phrase, but for foreign bankers and investors who cut their teeth interpreting former Federal Reserve chair Alan Greenspan, it’s refreshingly clear in terms of intention.
The numbers back this point up. The country’s FX reserves have been rising for eight straight months as of September, a telling indicator that they have stopped intervening.
But perhaps the clearest sign comes this week. The National Congress of the Communist Party is typically a time when the party tightens its grip, mindful that nothing should go wrong ahead of a crucial leadership transition. The fact that the government has let the renminbi experience a three-week depreciation so close to the start of the meeting is a comforting sign — and a telling one.