2015-06-26

China Listens to U.S.; Stops Intervening in Currency Market, Yuan Falls

Bloomberg: Yuan in Hong Kong Drops as China Pledges to Limit Intervention
The yuan traded in Hong Kong fell to a one-week low after China committed to limiting foreign-exchange intervention as it concluded an annual dialog with the U.S.

The Asian nation said it will move to a more flexible, market-based currency while pledging to make its exchange-rate policies more transparent as officials wrapped up diplomatic and economic talks. China will “steadily” increase the yuan’s convertibility as it bolsters the case for it to be included in the International Monetary Fund’s reserve-currency basket, a deputy governor of the People’s Bank of China said Friday.

“The pledge of less intervention makes investors pessimistic because they expected the PBOC to support the yuan as the economy is slowing,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. “But making the yuan a reserve currency is still the priority for China, so it won’t let it fall sharply this year.”
The best strategy for the U.S. here would be to require greater convertibility as a prerequisite for entering the SDR. If China balks, it's several more years before China is in the SDR. If China agrees, they'll have to deal with heightened risk of capital outflows.

Christopher Balding notes:
“Yet the PBoC has also indicated that its vision of “convertibility” does not involve the kind of unrestricted capital flows that wreaked havoc on emerging markets during the 1998 Asian financial crisis and again during the global financial crisis in 2008. “The capital account convertibility China is seeking to achieve is not based on the traditional concept of being fully or freely convertible,” PBoC governor Zhou Xiaochuan told the IMF in April.”

The IMF for all the Ivy League Phds should return to Economics 101 about what constitutes a freely tradable currency and its importance for being a reserve currency.

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