On Thursday, China’s vice president said that the government has no intention of devaluing the Chinese currency yuan.
“The fluctuations in the currency market are a result of market forces and the Chinese government has no intention and no policy to devalue its currency,” Li Yuanchao told Bloomberg in an interview on the sidelines of the World Economic Forum’s annual meeting in Davos, Switzerland.
Moreover, Fang Xinghai, a senior economic adviser to the Chinese leadership, said in the World Economic Forum that the Chinese government was committed to a new approach that would manage the yuan based on its performance against a basket of global currencies, as opposed to just setting it against the U.S. dollar. It was the first time Chinese government announced so clearly about their new policy. In addition, he said the success of the new approach should be measured in the long-run and not by short term shifts in policy.
Christine Lagarde, managing director of the International Monetary Fund, speaking in the World Economic Forum, subtly admonished the Chinese leadership, saying officials need to do a better job communicating their exchange-rate approach.
In August 2015, the Chinese government allowed the currency to devalued approximately 2% against the U.S. dollar and laid out a new strategy to fix it each day based on its performance within a narrow band the prior day. In December 2015, the central bank signaled through an editorial posted on their website that its intention to move toward navigating the currency against a basket of currencies, even while maintaining a band. In January 2016, the People’s Bank of China allowed the currency to substantial deviation from its previous day’s close. Each was a twist in a policy that hadn’t been fully laid out.
So far, the central bank has never publicly explained its intentions behind each of those adjustments. And market turmoil in recent months has coincided with the hard-to-discern shifts in China’s exchange-rate approach.
In the first week of January, the central bank surprised the market by sharply fixing the yuan weaker than its previous close. That action caused a selloff of everything from the yuan, Chinese stocks, global equities and commodities, as it fanned fears that China’s economy was slowing faster than Beijing had let on and the central bank would engage in big currency devaluation to help revive growth.
Struggling to contain the near-panic selling, the central bank then moved to prop up the yuan by both setting stronger fixings and directly purchasing the yuan and selling dollars in the currency markets. In addition, the central bank has tightened capital controls to prevent money from leaving China and make it more expensive to bet against the Chinese currency.