I don’t think it is in the interest of the US (or Europe) for China should move to a “market-determined” exchange rate when that more less means letting the CNY float down (even tho it never floated up unfettered)
This is a case where the “market reforms” are the best path frame doesn’t completely work imo. Implementation here would be selective — I have no confidence that if the CNY floated down it would float up .
But there is a real debate on this question, at least outside of China. Eswar Prasad implicitly gives the opposite advice “Pan will be tested right out of the gate in establishing his credentials as a reformer committed to a more market-determined exchange rate” 3/
Quotes are from the @Lingling_Wei profile of Pan Gongsheng, the expected new governor of the PBOC.
The Man Charged With Steering the Yuan Through China’s Economic
@Lingling_Wei The core issue is the tension between internal balance (Chinese activity is weak by Chinese standards) and external balance (China’s trade surplus is high relative to China’s past, and at record levels v WGDP) 5/
@Lingling_Wei China didn’t — based on the PBOC and SCB balance sheet data — use any of its fx reserves or its hidden fx reserves (in the state banks) to defend the CNY in June (even as the CNY slid) 6/
So my view is pretty simple: China has multiple tools (reserves, controls, rates) to use to hit multiple targets. It resisted CNY appreciation in 2020 and 21 pretty strongly (via the state banks) & it has plenty of capacity to resist depreciation now.
Shadow reserves — how China hides trillions of dollars of
And obviously I think letting the CNY go now would undercut pressure to undertake the structural reforms China needs to lower its savings rate and strengthen the consumption engine for growth. (not the usual argument, but one where I have a lot of conviction) 8/8
Good summary of the fiscal choices facing Chinese policy makers. I obviously agree with those calling for China to do a household focused stimulus, and think the constraints on this are fundamentally self imposed.
China’s Fading Recovery Tests Policy Makers’ Economic Playbook
It’s floated up from 8.3 to around 6 and PBOC resisted that entire move by the way, building up its stockpile along the way — and it ended 10ys ago more or less
For evidence that the PBOC resisted (and by more than it disclosed) see: