When it comes to managing a currency, image - and indeed timing - is almost everything. Beijing's actions on Tuesday to allow the trading band for the renminbi against the dollar to widen to better reflect market movements comes after weeks of bad news for the Chinese economy. The most recent export data released last week, for instance, showed that Chinese exports had declined 8.3 per cent in July. On cue, on Tuesday, the People's Bank of China allowed the renminbi to fall by 1.9 per cent. The juxtaposition of the two events suggests to some that Beijing was seeking to bolster its exports and is using devaluation towards that end. But, China is also eager to see the renminbi elevated to the hallowed status of a global reserve currency alongside (and eventually replacing) the US dollar. Just a few days before the bad news on exports, the International Monetary Fund (IMF) said China needed to be more liberal in its management of its exchange rate to qualify for inclusion as a reserve currency. The IMF will later this year decide whether to include the renminbi in an elite basket of currencies.
Whether it is pursuing economic growth or status as a reserve currency, Beijing is nothing if not single-minded. Its actions suggest that it is in fact seeking to allow the renminbi to reflect market movements. That this decision comes just a couple of months after the Chinese central bank's second most senior official told a conference in Shanghai that the weakness in the economy would not lead to rapid depreciation in the renminbi suggests that Beijing is now also increasingly concerned about the weakness in economic growth. In allowing the currency to depreciate, China may be solving two problems simultaneously. When it comes to export competitiveness, it is worthwhile to remember that the renminbi's inflation-adjusted, trade weighted exchange rate is actually up by about 10 per cent since January 2014, according to the Bank of International Settlements. In addition, factory wages have risen by on average 13 per cent annually since 2010, partly the result of government pressure on employers to pay workers better after a series of strikes and suicides in southern China.
The risk is that the market will pay heed to both an increased flexibility on the part of authorities in currency management and increased doubts about the health of the Chinese economy - and so the renminbi will depreciate more quickly than was intended. It is hard to believe that China's hefty trade surplus - which doubled to $306 billion in the first seven months of the year - is a concern for Beijing. But, the risk of defaults by Chinese companies with dollar-denominated debts (estimated by Daiwa to be as high as $3 trillion) if the renminbi slides will worry it, and with good reason. India's exporters are already suffering month on month double-digit declines. They will call for the rupee to be allowed to weaken, but there are also plenty of companies with unhedged dollar debt. The Reserve Bank and the People's Bank of China have a difficult balancing act ahead.
