China should keep focusing on growth and not worry about a weak yuan
- The yuan has weakened significantly against the dollar multiple times since 2015, with the People’s Bank of China fighting to defend its value for fear of a collapse
- But despite a sharp depreciation again this year, policymakers have held back, suggesting a stronger confidence in the Chinese economy
Though the move itself was correct, it triggered a sudden rise in expectations of renminbi depreciation. With that, capital began flowing out of China – and continued to do so through to the end of 2016. To shore up the renminbi, the PBOC burned through some US$1 trillion in foreign exchange reserves during this period.
In the past, whenever the renminbi’s dollar exchange rate neared the 7 yuan threshold, some economists would warn that a collapse could follow if the threshold was allowed to be breached. This time, the PBOC has held firm in rejecting sustained intervention – and of course the crash has not come.
Now, external pressure on the renminbi is waning. This is partly because of developments in the US: inflation has fallen for four consecutive months, and, perhaps more important, central bankers seem to have realised that their aggressive monetary tightening – 75-basis-point rate hikes at four consecutive policy-setting meetings – is untenable.
But the renminbi’s value is not decided by US central bankers. The currency retains a fundamental strength, rooted in market confidence in the Chinese economy. This time, renminbi depreciation has triggered no panic in China’s financial market, which reflects the maturity of Chinese investors and the market itself.
Whatever happens, the PBOC would do well to stick with benign neglect, allowing the exchange rate to act as an automatic stabiliser, while treating capital controls as the last resort. In other words, China’s government should focus on economic growth and let the market take care of the renminbi.