What really happened to the Chinese markets a couple of weeks ago?
Published on August 24, 2015
In what the IMF has called a “welcome step”, the PBOC last week caught markets by surprise when it abruptly altered the way it sets the daily midpoint for the narrow band in which China has allowed the currency to trade against the US dollar since 2005.
The IMF has for years called for China to allow a greater role for the markets in all of its economic policies. But in their annual assessment of China’s economy released on Friday, the IMF’s staff wrote that during discussions with Chinese authorities in May they had stressed that it was becoming increasingly urgent for Beijing to act on the exchange rate, which is now to move only in a 2 per cent band around the daily midpoint.
“More flexibility is becoming increasingly critical to move to an effectively floating exchange rate,” the IMF economists wrote in a summary of their discussions with Chinese authorities presented to the board last month but only released publicly on Friday.
China needs to move to something akin to a floating exchange rate within two to three years, they said. But “steps over the next few months could include a further widening of the band and changes to how the central parity is set”, the IMF economists wrote. The latter is what the PBOC opted to announce on Tuesday.
Markus Rodlauer, the IMF’s mission chief for China, declined to reveal the details of the fund’s discussions regarding the exchange rate with Chinese authorities in May. But he said there had been a
“meeting of the minds”
on the need for markets to play a greater role in setting the value of the renminbi.”
Will this ‘concession’ be enough for the IMF to approve the Yuan in their little SDR currency basket? I think it will.
Now, will the IMF move to replace the dollar (with its own SDR) as the world’s exchange currency? I think it must.
October 9-11, 2015
Pay attention. And pray. What comes after this will forever affect us all.