Christopher Balding, a reputable expert on the Chinese economy, notes that the Chinese yuan has become increasingly localized in 2016 even as the IMF prepares to officially include it in its basket of international reserve currencies, the special drawing right (SDR) this fall.
Unfortunately, the piece gives the impression that Beijing is deliberately backsliding on its commitment to liberalize the yuan, where in reality it's taking prudent precautions before what it knows to be an inevitable opening of the capital account in the coming years.
It all boils down to a fundamental question: should important currencies whose valuations have global impact be left to a mythic "free market" that can always be trusted to price them fairly?
Events since China's surprise devaluation last August should be enough to give the answer as a resounding "not yet."
There are two gaping holes in Mr. Balding's thesis that China is making a mistake by going it slow on RMB internationalization.
First and foremost, China is hardly alone in manipulating its currency - it's probably not even the most egregious offender. For all the talk of the sacrosanct "free market", the Western financial system is arguably the most blatant ponzi scheme in the history of humanity - one from which Beijing's own worst excesses arguably merely take their cue. It's called a "free" system because it's built on private bank credit, yet in reality it has long since become a massive monetary cartel which has co-opted the government authorities of its host countries so thoroughly that its operations have for most intents and purposes become just as artificially controlled or manipulated as that of "socialist" or "planned" systems.
That's not to say this is inherently bad - quite the contrary, China owes its dramatic economic rise since the 1990s to precisely this extraordinary concentration of Western economic authority - and, by extension, political influence - into the hands of a tiny elite of cutthroat "financialists" driven by an insatiable appetite for endless profits. If any nation has benefited from the maxim that "greed is good", it would be post-Mao China.
But that leads us to the second big hole in the China-bashing argument over the yuan's temporary seal-off: as of mid-2016, this post-Bretton Woods (i.e. post-gold standard) global monetary system is, on the whole, clearly at an inflection point where something is about to give - and perhaps give "bigly", as Donald Trump would say. The hyper-financialism of the 1990s and 2000s - facilitated largely by the rise of China, before then being extended further beyond its natural lifespan in the wake of the 2008-09 crisis on back of even greater reliance on the middle kingdom (in collusion with ultra-loose monetary policy by rich-world central banks) - has reached its logical conclusion of a global debt deflation crisis. In this unprecedented circumstance, all traditional or conventional argument or debate pertaining to "markets" is out the window: you have to be a blind ideologue these days to continue insisting that the Western "neoliberal" model of "free trade" and "deregulation" underpinned by a 45-year-old cult of fluid fiat credit is still anything like the classic laissez-faire regimes described by Adam Smith or Friedrich Hayek.
August 11, 2015 will go down in history as the day that post-Bretton Woods came apart at the seams with the Chinese central bank, PBOC, shocking global markets and policymakers by devaluing the yuan by nearly 1.9 percent. In the ensuing weeks, the world got a taste of just how much this seemingly minor reset could upset "markets" from Tokyo to New York to London: in the face of a less than 4 percent decline in the RMB against the dollar starting with PBOC's move, stocks were crashing to price in the illiquidity that a possible larger Chinese devaluation of 10-20 percent would introduce to US dollar-denominated global trade and finance flows. The carnage effectively sealed the Fed's dependence on China for its long-awaited interest rate hike timetable: so much for the "free market"!
Almost a year later, Beijing's prudent caution - and its continued collusion with Washington - are the unspoken reasons that the global financial turmoil of last August and September and this January and February haven't translated into a new 2008-style meltdown, the prospect of which sent numerous hedge funds chomping at the bit to pocket an even "Bigger Short" whether in Asian currencies, crude futures, or European banks. But don't expect Western talking heads to adapt easily to this brave new world of shamelessly transparent manipulation of "markets" and propping up of asset values by central bankers and their "commercial" or "investment" banking surrogates: it's a given in the Judeo-Christian heritage (the character of which even a secular postmodern West still retains) that ideology is effectively the basis of rational analysis, even as that very analysis can only point to the gutting of its a priori foundation.
Back in the real world of late, the yuan's quasi-peg against a basket of trade-weighted currencies is gaining credibility, as even the re-widening of the offshore-onshore spread in recent weeks hasn't yet triggered runaway devaluation fears.
While the offshore (Hong Kong) RMB has in fact flirted with 6.60+ to the dollar for the first time since the February global market doldrums, it likely has a "safety zone" of perhaps 500 pips (5 yuan-cents) between 6.60 and 6.65: below this floor against the greenback, PBOC can only expect an acceleration of capital outflows, which picked up again in May after being tamed in March and April. Hence, as of late June, the central bank appears to be in relatively firm control of the currency's movements - and that's the kind of stability and predictability that the "market" clearly wants.
Mr. Balding's critique that this propping up of the currency will only lead to more malinvestment in China is a valid concern: for this reason, it's in Beijing's best interest to let the yuan gradually slide to a level more appropriate with the actual balance of payments. This doesn't change the fact that, for now at least, such a sensitive shift can't be left to "market" forces.
For that matter, that's the broader conclusion for the entire global economy: whatever "market" truly does exist is as much the creature of its "market makers" - ultimately the constellation of central banks - as it is of truly independent private participants. It would make perfect sense to talk of the merits of a "free" system if that's indeed what the West itself has practiced; it borders on absurdity if in fact it hasn't. Believe it or not, China isn't necessarily behind the West anymore when it comes to some common macroeconomic sense: perhaps only socialists truly understand the downside of socialist money.
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