Beijing urged to be transparent with its financial decisions in light of market turmoil
Turmoil after yuan devaluation shows that with China's new economic might, Beijing's opaque approach to communication is no longer viable
When Premier Li Keqiang takes to the podium to address some 1,700 global business leaders and financial officials at the World Economic Forum in the northern port city of Dalian today, his message will be closely scrutinised by investors hungry for insight into the thinking of Chinese leaders.
For an economy second in size only to the United States, and whose health affects the farthest reaches of the globe, China can be frustratingly enigmatic and immature when it comes to communicating major financial decisions to the rest of the world.
READ MORE: China’s premier downplays fears of global currency war, ensures that currency will remain stable
After the shock move to devalue the yuan, three weeks passed before central bank governor Zhou Xiaochuan publicly defended the policy, telling a G20 meeting last weekend that the yuan was stable and not set for a long-term devaluation.
Many commentators blame the lack of communication by officials for making the market turmoil that followed the devaluation even worse.
China devalued the yuan by 1.9 per cent against the US dollar on August 11 - the largest devaluation in two decades. In the absence of a clear statement from authorities, rumours and speculation went viral, with many analysts speculating the mainlandplanned to enter a "currency war". In the next two days, the yuan fell a further one per cent.
"The yuan had been strong and stable. The widely unexpected devaluation brought big uncertainty to the world market," said Tao Dong, an economist at Credit Suisse. "The central bank did not clearly reveal its intention when it took the action, which generated concerns that China was initiating a currency war and exacerbated worries over economic risks," Tao said.
The People's Bank of China held no press conference to accompany the devaluation. It merely posted a terse statement to its website saying that, due to supply and demand in the foreign exchange market and exchange rate movements, it aimed to improve "the parity of RMB against the US dollar" to "enhance market orientation".
It posted another statement later the same day in further explanation, but the messages were unconvincing and failed to soothe market jitters.
After two days of harmful speculation, the central bank held a press conference on August 13, open to a limited number of media, where deputy governor Yi Gang explained the devaluation was a one-off move to bring the yuan into line with the market and there were no reasons to depreciate the currency sharply.
But by then, the seeds of doubt had already been sown - so much so that many foreign exchange players still expect to see a 10 per cent depreciation of the currency in the next few years.
"The communication of the decision was poor and generated considerable confusion," said Tom Rafferty, Asia analyst for the Economist Intelligence Unit.
Rafferty said the initial statement had been "poorly translated", and criticised the central bank's decision to delay holding a press conference. Even when it did hold the conference, a large portion of the foreign media was excluded - a decision, said Rafferty, that was "simply not acceptable given the significance of the policy move and the global interest in the issue".
Many economists and market participants saw the devaluation as a move by China to become the last major economy to join a low-intensity "war" of currency weakening, after a decision by Japan to allow the yen to soften to make exports competitive.
Signs of an imminent race to the bottom were evident as, on August 11, the won fell to its weakest since June 2012, while the Taiwan dollar dropped to its lowest in more than five years. The Australian dollar saw its biggest single-day decline in more than seven months and the Indian rupee lost the most in two months.
The yuan lost value for three days in a row, not stabilising until authorities bought the currency heavily on the foreign exchange market and set a slightly stronger daily reference price.
Even so, it was not until two weeks later, on August 25, that a top-ranked official addressed foreign counterparts about the yuan's devaluation, when the premier told a delegation from Kazakhstan there was no basis for continued depreciation.
[Beijing] has been accustomed to not communicating its decisions very transparently either domestically or internationally; this approach is no longer viable
"There already exists a web of multilateral forums through which these decisions can be communicated," Rafferty said.
"The government has been accustomed to not communicating its decisions very transparently either domestically or internationally; this approach is no longer viable given the importance of China's economy to the rest of the world," he said.
Despite Li's assurance, jitters about further yuan devaluation continued, leading to Friday's address by the PBOC at the G20 meeting in Ankara, Turkey.
On the sidelines of the summit, US Treasury Secretary Jack Lew asked Finance Minister Lou Jiwei to "refrain from competitive devaluation".
Lew told Lou it was "important for China to signal that it will allow market pressures to drive [the yuan] up as well as down", according to the US Treasury.
He asked Beijing to "increase the transparency of its exchange rate policies" and communicate its policy intentions and actions to financial markets.
According to the central bank, under a new mechanism for deciding the yuan's exchange rate, market makers consisting of 10-20 Chinese and overseas financial institutions make daily quotations after considering the closing price of the previous day, changes in supply and demand and overnight movements in European and US markets.
Leaving out the highest and lowest quotations, the PBOC sets its reference rate as the average of the remaining quotations.
However, it is unknown to what extent the pricing is decided by market forces or by the central bank's influence on state bank market makers. The weight given to each of the three factors considered is also obscure.
Beijing's reticence to communicate is in stark contrast to the massive influence of the Chinese economy, and its public relations efforts often appear crude and immature compared with Western counterparts. Western central bankers and economic decision-makers all understand the importance of communication, particularly on sensitive issues like exchange rates. Revealing too much may be disastrous but a lack of transparency can produce unnecessary shocks.
When Mario Draghi became head of the European Central Bank, the Italian carefully courted the German media as he understood the importance of winning its backing for his policies to succeed. Such were his skills, even the anti-bailout, conservative newspaper was won over, at one point declaring Draghi a "proper Prussian".
Ben Bernanke also had good relations with the media. As chairman of the US Federal Reserve, he won the trust of the public by stressing the importance of transparency in the Fed's decisions. He used the media to manage expectations, test reactions and drop hints.
In contrast, the decision-making processes behind China's financial and economic policies remain opaque - baffling even for many China observers. The way decision-makers release information and communicate with the public is largely the same as 20 years ago - when the impact of China's economy on the rest of the world was much less obvious.
Jin Canrong , a professor of international relations with Renmin University, said officials were expected to communicate Beijing's stance more frequently in future.
"Chinese officials will have to do more to communicate policies with the world to avoid misunderstanding, although foreign countries may not buy it. Ultimately, what can make them believe are China's actions. The world is watching whether China can proceed with the market reforms it says it's heading for."
