However, despite these moves, markets have been much less concerned than previously. Why?
The moves in August 2015 and to a lesser extent in January 2016 caused markets to panic because they did not understand the PBoC’s motives and misinterpreted the ultimate objective.
It also caught the market by surprise and had little, if any, forewarning. Financial markets do not like surprises, particularly when it comes to a large market like China that is trying to integrate with the world and build trust and credibility with the global community.
Secondly, economic conditions globally and certainly in China warranted a weaker RMB and in fact, the USDCNY spot price had traded much weaker than the PBoC fixing in the lead up to the change indicating markets felt the RMB was overvalued.
In addition, the RMB had been on a constant .trend over the past decade so some retracement was inevitable as China embarked on supply side structural reform and overall GDP growth slowed.
Finally, the currency wars and deflationary pressures that markets feared from a weaker RMB have yet to eventuate. A weaker RMB should theoretically make China a more competitive export nation but it wasn’t clear that a stronger RMB had caused any decline in China exports previously.
In short, the market calmed down and the measures introduced by the PBoC to limit capital flight and cross-border foreign exchange arbitrage significantly reduced RMB volatility. The PBoC’s direct intervention in the onshore and offshore foreign exchange markets also stabilised movements.
But at what cost? And how has all this left the RMB in the eyes of the global community?
It is really a double-edged sword at the moment. On the one side, the daily fixing is much easier to predict and in normal markets, the USDCNY spot rate operates in accordance with the PBoC’s ‘managed floating basis’ objective. The world has become generally comfortable with the RMB’s valuation and better understands how the framework operates.
On the other side, market participants are certainly wary China can still be unpredictable and while the PBoC has less flexibility to manage the currency through the daily fixing, it has certainly shown its willingness to flex its muscles through intervention and other measures to promote stability ahead of any other priority.
That’s where we are at the moment. Stability is currently trumping a more liberal currency and RMB internationalisation regime; this is possibly a sensible position for the moment.
China is not in a hurry and will progress with liberalisation to the extent markets can absorb the changes with minimal volatility and stress. RMB internationalisation and foreign exchange reform will remain key pillars in China’s future.
The last year has been a roller coaster for the RMB and China still has work to do to build the necessary trust with investors and other participants required for greater RMB usage globally.
Developments over this time, however, represent necessary and painful steps towards a more open financial system with a free-floating exchange rate and free cross-border capital flows.
China still has a lengthy and complex liberalisation journey ahead and while the pace has clearly slowed for the time being, China is very much playing the long game.
Daniel Everett is Global Head of RMB, Strategy and Execution at ANZ
ANZ, in partnership with the Financial Times will be hosting the next installment of the FT-ANZ RMB Growth Strategy Series in London on September 22. For further information click HERE.