Time warp alert. Data on Monday showed that China is on course for its first annual pick-up in growth since 2010 — the year it became the world’s second-largest economy. Meanwhile, the renminbi is hitting its best levels against the dollar since November. A function of the weakening dollar or something more significant?
Something has shifted in the way Beijing wants to manage the renminbi. Last week, the People’s Bank of China mused about widening the band in which it permits the currency to trade onshore. The PBoC’s own power within China is growing too: over the weekend at the twice-a-decade financial work conference, it was the central bank that gained influence at the expense of other regulators.
In truth, widening the trading band will do little to the renminbi since it has never come close to hitting its current limit of 2 per cent either side of a midpoint. The most it has managed was 1.3 per cent, and that was caused by the PBoC’s blindsiding global markets in August 2015 with what it had thought would be a minor shift in its exchange rate regime.
Those sceptical that the PBoC means to ease off this time can also point to the changes made in May when it introduced a “counter cyclical” element to how it sets the midpoint. Most consider this to be a free pass to disregard market moves when deemed necessary.
The most likely explanation this time is that tighter control is not necessary just at this point. At 6.9 per cent year-on-year in the three months to June the economy is, for now, doing better than expected, helped by a property boom and a pick-up in company profits following the rally in commodity prices. China’s foreign reserves have risen for five months as a result of Beijing’s efforts to curb capital outflows, while wholesale borrowing costs have begun to ease following a painful tightening.
This happy picture paints over a fragile balancing act especially as the all-important autumn party congress looms. If the PBoC’s musings about liberalising trading ranges help it avoid a debacle like that of August 2015, then that is to the good. But few can believe the PBoC is seriously considering relaxing its grip or even speeding up liberalisation. This is not 2010, with its China optimism, after all.