China Moves to Stabilize Currency, Retreating From Effort to Ease Control

Every weekday, the government sets a benchmark value for the renminbi against what is supposed to be a basket of currencies, although the dollar dominates. The renminbi is then allowed to rise or fall in value only 2 percent from the benchmark during the day.

On Friday, the government said it was considering introducing a “countercyclical variable.” A better name might have been “fudge factor.” Basically it means that the government will no longer have to follow the previous day’s closing price in setting that day’s benchmark.

Why Change?

Starting in the summer of 2015, when China’s stock market crashed and when Beijing shocked the world by abruptly weakening its currency, a lot of money left China. Many in China did not want to hold stocks, bonds or other assets in a currency that was losing value in the broader financial world.

In response, Beijing tightened its already considerable limits on money leaving the country. Still, the potential for the currency to weaken further, amid doubts over China’s debt woes and slowing growth, has lingered over markets.

China’s financial regulators generally do not announce they are considering a shift in something as essential as the value of the currency unless they have already approved it, so the announcement on Friday was widely viewed as a signal to financial institutions, corporations and investors that change was on the way.

Who Wins and Who Loses?

The Chinese government contends that the winners are Chinese companies and households. Their assets are less likely to rise and fall quickly in value because of whatever is happening in financial markets. The Trump administration also will likely be pleased, because although it amounts to Chinese currency manipulation, it will keep China’s currency from weakening. If the renminbi weakened further, it could help Chinese exporters at the expense of American manufacturers.

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