THERE was a time when virtually all the ills of the world economy were blamed on the yuan. Critics charged that China’s intervention to suppress its currency had led to anaemic imports from Europe and America, to a savings glut that flooded America with cheap credit and even to the global financial crisis, since the cheap credit enabled irresponsible lending. The allegations were exaggerations. But it was evident that China had held its exchange rate down, boosting its companies at the expense of others. So it was a notable shift when the International Monetary Fund declared this week that the yuan was “no longer undervalued”.
Not everyone agrees. Jack Lew, America’s treasury secretary, was quick to say that he still sees the yuan as undervalued. With China in their sights, American senators passed a bill earlier in May that could lead to sanctions against foreign countries deemed to manipulate their currencies. The IMF’s previous assessment that the yuan was too cheap had lent a veneer of intellectual credibility to such drives. Its new language strips that away.
The change was a long time in coming. The IMF had signalled for months that it was likely to soften its stance. After all, over many years, the Chinese authorities have allowed a persistent, if gradual, appreciation. The yuan has climbed by a third against the dollar in the decade since it was formally de-pegged. More striking has been its climb against other currencies, especially over the past year. By staying basically level with the dollar during a period when the greenback has been appreciating strongly, the yuan has gained 14% against a trade-weighted basket of currencies since mid-2014, according to the Bank for International Settlements (see chart).
That has had an impact. Roughly $300 billion, a record amount, flowed out of China via its capital account over the past two quarters. In part that is because some firms thought that, with the economy slowing, the yuan might depreciate. That in itself is a sign that it is more fairly valued than in the past: investors disagree about whether it ought to go up or down.
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Yet China has not abandoned currency intervention altogether. Although the central bank has stepped back, traders say it is still the biggest player in the local foreign-exchange market. The direction of its intervention has changed, however. Left to its own devices, the yuan would in all likelihood have depreciated in recent months. The central bank appears to have propped it up. Analysts say it has wanted to send a signal of confidence about the economy.
The IMF recognises that more reform is needed, calling on China to implement a truly floating exchange rate within three years. But for American lawmakers who propose import duties against countries that suppress their exchange rates, Chinese actions to bolster the yuan raise an awkward question. Would they acquiesce to subsidies to help Chinese exporters which are being hurt by their government’s strong-currency policy?
This article appeared in the Finance & economics section of the print edition under the headline "Feeling valued"
