China affairs specialist Andrew Dougherty discusses China’s currency strategy and how its gradual approach to devaluing the renminbi has defied market expectations.
Matt Miller: Talk a little more about where the currency may go — different debates on this. What’s your emerging perspective?
Andrew Dougherty: I have to admit I’ve been surprised by the market’s surprise at the renminbi’s moves. Now, the changes in the fixing mechanism and the change in the nature of how the PBOC attached, or pegged, the renminbi —
Matt Miller: That’s the People’s Bank of China.
Andrew Dougherty: Sorry, thank you: the central bank, the People’s Bank of China. The change in the way they used to peg it to the dollar on an informal basis — and now we’re doing it on trade-weighted basis — those changes were not predicted by most people. There was an expectation that there would be an evolution in that direction as they wanted to join the IMF’s — International Monetary Fund’s — strategic depository. We knew that they would be changing the renminbi, in the way they manage the renminbi, in accordance with IMF guidelines, etc. The fact that those policy changes were accompanied by a small devaluation in both cases was somewhat surprising, but when you look at renminbi devaluation against the dollar, it didn’t start last year. And this is where I think the market sort of forgets.
In 2014, there was a 2.5% devaluation of the renminbi against the dollar. Last year it grew to 4.5%, give or take, against the dollar.
Matt Miller: Total.
Andrew Dougherty: Total, yeah. The way they managed the renminbi — and that was accompanied by these small devaluations — the market perceived that as a new policy and a new shift in direction. And so now you have a lot of voices saying, “OK, they need to — or they have to, or they want to — devalue the renminbi, and we should be expecting a one-off.” More conservatively, people say 15%; a lot of people are saying 30%-40% devaluation to the renminbi. “They have to do this.”
I think that’s certainly misinterpreting their intentions. Whether or not at some point they’re forced to have a more aggressive approach to devaluing their currency is another question. But my belief is that the central bank doesn’t think that that’s the right strategy and that they’re trying to manage this trade-weighted basket on a relatively flat basis — which, if you assume depreciation in the yen and the euro and some other currencies that are in the basket against the dollar, then you’ll probably get some depreciation of the renminbi against the dollar on a reduced basis, right? So if those currencies against the dollar depreciate 10% and they’re worth about half the basket, then the yuan might depreciate, on a total basis, about 5%. Right?
So we’re not expecting a large one-off depreciation this year. We don’t think that’s what they want. We don’t think it’s actually necessarily good for China. The reason why I don’t think that will happen is, number one, Chinese policy is rarely very aggressive. The old adage — Chinese adage — that Deng Xiaoping used in the ’80s was, “We cross the river by feeling the stones.” It’s sort of experimental policymaking. They watched the experience of Russia in the ’90s and said, “We don’t want that sort of a shock therapy.”
So a) it’s not in their DNA, b) is it not an option at all? Of course, it could be an option if growth got slow enough and they became desperate enough. But they have other options to support and stimulate the economy. So they’re taking a very fluid approach to it, and I think the market’s perspective is very binary. It’s sort of “you either do or you don’t.”
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