China’s central bank traditionally hasn’t been well-known for its loquaciousness. And its currency arm, the State Administration of Foreign Exchange, was considered borderline mute.
No longer. Lately, it’s been hard to get the People’s Bank of China to stop talking. There was a rare media briefing by PBOC Vice Governor and SAFE Director Yi Gang in March, then SAFE’s unusual statement in May denying a report that it was considering reducing its euro bond holdings. Then the floodgates really opened on June 19, with the PBOC’s big announcement on changing the exchange-rate mechanism, followed by another statement the next day explaining the previous day’s statement.
Then in the last 15 days, PBOC Vice Governor Hu Xiaolian has released a string of statements explicating the new currency regime and talking up the advantages of a flexible exchange rate. Hu issued the first one on July 15, then another on July 22, and another on July 26. That inspired Bank of America-Merrill Lynch economist Lu Ting to pen a research note headlined “Who is Ms. Hu? And what’s her trilogy on money and FX?” But the title was quickly outdated, as it became a tetralogy on July 28 and a pentalogy on Friday.
Meanwhile, SAFE has had its own bout of prolixity, with a series of five Q&A-form statements on the exchange rate between July 2 and July 9, followed by a mammoth transcript of Director Yi’s interview with China Reform magazine, in which he hints that a freely floating exchange rate may be the central bank’s ultimate goal , and acknowledges that rapid economic expansion will inevitably slow in coming years.
There is some precedent for all this talk. After its last big currency move, in July 2005, the central bank also issued several explanatory statements (here and here) –though they weren’t as numerous or as energetic in promoting the upside of an unshackled yuan as the recent spate of statements.
One possible explanation is that the PBOC now realizes it needs to get the public behind controversial policies such as yuan appreciation if it is to win behind-the-scenes battles with opposing interest groups. That in turn is because the PBOC, unlike other central banks in major economies, is not independent. Every interest-rate change or major move in the yuan needs approval from China’s top leaders, who, despite China’s authoritarian rule, must increasingly take into account both popular opinion and the interests of wealthy exporters.
In Hu’s statement on Friday, for instance, she anticipated that some Chinese companies will face difficulties and maybe even go under because of exchange-rate appreciation, and issued a pre-emptive rebuttal:
“Some companies benefit from changes in exchange rates and some companies suffer…usually, in order to obtain policy assistance from the government, companies tend to emphasize the impact of a floating exchange rate on their exports, profits and employment, but seldom mention improvements in import costs and other factors.”
And in a rare interview with independent local media, Hu’s PBOC colleague Yi appealed to the bread-and-butter interests, so to speak, of China’s common man:
“Some people say that the common folk don’t buy imported products, so yuan appreciation doesn’t benefit them. This is wrong. For example, soybean oil. China imports over half its soybeans, and countless households eat soy products,” he said. “And soy meal is used to feed pigs. How many people eat pork?”
Yuan appreciation will also benefit Chinese who travel or have children studying abroad, he added.
Still, for all the PBOC’s chatter in recent weeks, it is leaving some very important details unsaid. Why, for instance, has the yuan basically stopped appreciating after rising just 0.7% against the dollar? PBOC officials can pontificate all they want about the benefits of currency flexibility, or even more nebulously, about referencing the yuan against a basket of currencies, but markets are looking for concrete action, in the form of a moving exchange rate. Otherwise, the PBOC could just be talking itself into an ever-greater credibility gap.
– Jason Dean and Aaron Back www.wsj.com