Hu Xiaolian, a deputy governor of the People’s Bank of China, said the central bank might start to publish the yuan’s nominal exchange rate measured against the currencies of China’s trading partners in order to lessen an excessive focus on the yuan’s worth in dollars.
What’s more, Hu flagged that managing the yuan according to a basket might entail permitting the currency to fall against the dollar depending on market conditions — something that would be sure to ring alarm bells in Washington.
“The yuan will move up or down against a single currency, showing two-way movement, but the exchange rate will maintain overall stability at a reasonable and balanced level,” she said in an essay posted on the central bank’s website, .
Hu said it was the yuan’s value against a basket rather than any one currency — in other words, the dollar — that was critical for adjusting China’s exports and imports and its external payments.
Xing Ziqiang, an economist at China International Capital Corp. in Beijing, said the purpose of the statement was to quash the assumption that the yuan, also known as the renminbi (RMB), was a one-way bet to head ever higher against the dollar.
“The move is aimed at changing the narrow mentality of investors that de-pegging from the dollar can only mean that the Chinese currency will rise,” Xing said. “It will help to ease strong expectations of yuan appreciation and prevent rampant speculation on international markets.”
To kill the habit of focusing solely on the dollar, the PBOC would “try” to publish the yuan’s nominal effective exchange rate on a regular basis and thus gradually establish it as the benchmark and reference for managing the currency, Hu said.
Doing so should not be difficult. The Bank for International Settlements already produces a nominal and real, or inflation-adjusted, effective exchange rate series for the yuan.
Stephen Green, head of China research at Standard Chartered in Shanghai, said Beijing has always focused on the dollar/yuan rate because China’s exports were mostly invoiced in dollars.
Diverting attention to the trade-weighted exchange rate was commendable because it ought to lead to a more rational debate about the real value of the currency, Green said.
“If they want to really pursue, from an economics point of view, a policy of basic stability, then that implies quite a lot of renminbi/dollar volatility.
“Their problem at the moment is that basic stability means renminbi/dollar stability, which in actual fact isn’t very stable at all. So the central bank has got to change the terms of the debate,” he added.
Xu Biao, an economist with China Merchants Bank in Shenzhen, said one clear message from Hu’s essay was that a rapid rise in the yuan was not going to happen.
The yuan has risen just 0.7 percent against the dollar since Beijing ended a 23-month-old peg to the US currency on June 19.
“It is not realistic to expect China to let the yuan strengthen significantly,” Xu said.
Coincidence or not, Hu’s comments were posted a day after Federal Reserve Chairman Ben Bernanke handed fresh ammunition to China’s critics in Congress by saying Beijing effectively subsidized Chinese exports by holding down the yuan.
Xu said Hu’s essay was aimed at taking some of the consequent pressure off the yuan to rise.
“It’s telling the outside world: please don’t always look at the yuan/dollar rate; look at the nominal effective rate,” Xu said.
When Beijing freed the yuan on June 19, many economists played down the PBOC’s reaffirmation of its July 2005 declaration that it intended to manage the exchange rate with reference to a basket of currencies.
These economists were convinced that China in fact tracked the dollar between 2005 and 2008 and would continue to do so.
Other analysts, however, insisted just as forcefully that this time it was different and the PBOC would be switching to targeting a trade-weighted basket.
