China’s Newfound Dedication to the Market Falters When the Market Does Something They Don’t Like

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Noah Smith on Twitter last night:

I see some people asserting that China is devaluing the RMB to boost the RMB’s status as a global currency. I heavily doubt this.

China has two reasons to let the yuan depreciate. The first is self-serving: it makes Chinese exports cheaper and thereby helps the Chinese economy, which is in trouble. The second is their official reason: they have decided to stop setting the value of their currency by fiat. Instead they will let it follow the market, and right now the market thinks the yuan is overvalued.

Smith is telling us not to pay too much attention to the official reason. Yes, a freer exchange rate is necessary if China wants the yuan to become a major global reserve currency. But that’s just plausible window dressing to mask the real reason China is letting the yuan fall: to prop up their weakening economy.

Today, the Wall Street Journal reports that Smith is most likely right. After letting the yuan fall for two days, the Bank of China decided that maybe enough was enough—and intervened at the last second on Wednesday to increase the value of the yuan:

In a statement released by the central bank, the PBOC described greater volatility in the yuan’s trading as a “normal phenomenon” and pledged to keep the exchange rate “basically stable.”

But that message largely failed to calm the market, as traders rushed to sell the yuan and businesses flocked to convert their yuan holdings into dollars. The PBOC then instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, according to people close to the state banks.

The result: The yuan jumped about 1% in value against the dollar in the last few minutes of trading, bringing it to 6.3870 yuan against the dollar.

It’s still possible that once things stabilize a bit, China will let the yuan find its natural value. But Wednesday’s intervention suggests something else: when push comes to shove, China will intervene to do whatever it takes to help their economy. If that means letting the market have its way, well and good. If not, then they’ll pay no attention to the market.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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