Beijing wins a yuan battle, but will it lose the global currency war?
China’s surging yuan defeats short-sellers by hitting a 6-month high versus the US dollar as the dust settles after Moody’s credit downgrade
The corks should be popping on bottles of champagne at the People’s Bank of China, if Beijing’s policy goal was to defeat investors who dared to bet on a cheaper yuan after Moody’s recent downgrade of China’s sovereign credit rating.
If any speculative forces were attempting to short the yuan, the currency did indeed put them in their place by surging to a six-month high against the US dollar in the Hong Kong offshore market, aided by a behind-the-scenes push from China’s central bank. The Hong Kong offshore market is said to be more sensitive to market forces than its onshore counterpart.
As a result, the overnight yuan interbank borrowing rate has shot up to 42.8 per cent, an unhealthy sign for the yuan market. Beijing’s meddling in the yuan exchange rate also sends a signal that China is moving away from a promised “clean” floating exchange rate system.
“It is important to remember that China’s exchange rate is still fully in the hands of PBOC,” said Louis Kuijs, head of Asia economics research with Oxford Economics and a former economist with the World Bank. “At any point in time, the PBOC decides to what extent it wants to take market pressures into account as it sets the fixing rate and steers the spot rate. In that sense, China’s exchange rate is a solidly dirty float.”
Meanwhile, the yuan’s approximately 1 per cent appreciation in Hong Kong since May 25 and a 543 basis point upward change in the currency’s mid-point price on Thursday are just the latest examples of the Chinese government’s trend toward peddling back its liberalisation program - contradicting Beijing’s own strategic goal of making the yuan a global currency.