At a meeting behind closed doors which took place in March, some of China’s leading economists and bankers told the People’s Bank of China (PBOC) to stop fighting the financial markets and allow the value of the yuan fall.
They reportedly got nowhere. According to the Wall Street Journal (WSJ), an unidentified official from the PBOC reported that “the primary task is to maintain stability”, citing previously unreleased minutes from the meeting.
Beginning from March the fixing has started to follow the mechanism more.
The WSJ has reported that the PBOC scrapped its market-based mechanism for managing the yuan on the 4th January this year and returned to setting the exchange rate based on what suits authorities the best. The Chinese exchange rate is now back under tight government control although the reversal has not been formally announced. The PBOC is said to guide the daily direction of the yuan by alternating between setting its value against the dollar and a basket of currencies, according to sources at the central bank.
The yuan will be become an official reserve currency this year when it becomes part of the International Monetary Fund’s Special Drawing Rights.
Ken Cheung, a foreign-exchange strategist at Mizuho Bank in Hong Kong, commented: “Our view was already along these lines, so we’re not that surprised. Outflows after August were quite a scary hit to financial markets. After the yuan entered SDR, opening up the capital account was no longer a key priority, while yuan stability became a key priority. But we think beginning from March the fixing has started to follow the mechanism more.”
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A revival in the greenback has impacted on the yuan which has now fallen to a three-month low against the U.S. dollar, while rising to an almost four-week high against a basket of peers. Investors are in the meantime watching the currency as a barometer of the health of the world’s second-largest economy.
Last August, China devalued its currency by the most in twenty years, terminating a de facto peg to the dollar that was in place since March, 2015.
At a meeting with senior officials in December, President Xi Jinping is said to have referred to China’s regulatory system as “immature” and that most officials hadn’t done enough to guide the economy towards more sustainable growth.
U.S. – China Relations “Strained”
The aforementioned events mirror a similar scenario which took place in February, illustrating the differences that continue to fester between the world’s two biggest economies, U.S. and China.
At the meeting, U.S. Treasury Secretary Jacob J. Lew was about to urge China to move towards the adoption of a market-based exchange rate when his hosts in Beijing decided the media had heard enough.
While he was addressing Premier Li Keqiang, Chinese officials attempted to steer foreign reporters away but Treasury aides insisted the journalists stay until the end of Lew’s remarks. While the Chinese conceded, the incident highlighted how economic relations between the U.S. and China may be poised to enter a new period of turbulence.