Tuesday, August 11, 2015

China does what China wants to do

IMF expert analysis of Chinese exchange rate policy, May 2015 --

While undervaluation of the Renminbi was a major factor causing the large imbalances in the past, our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued. However, the still-too-strong external position highlights the need for other policy reforms—which are indeed part of the authorities’ agenda—to reduce excess savings and achieve sustained external balance. This will also require that, going forward, the exchange rate adjusts with changes in fundamentals and, for example, appreciates in line with faster productivity growth in China (relative to its trading partners). On the exchange rate system, we urge the authorities to make rapid progress toward greater exchange rate flexibility, a key requirement for a large economy like China’s that strives for market-based pricing and is integrating rapidly in global financial markets. Greater flexibility, with intervention limited to avoiding disorderly market conditions or excessive volatility, will also be key to prevent the exchange rate from moving away from equilibrium in the future.

The IMF put enough CYA clauses in there to handle various eventualities, but abruptly devaluing by 2 percent because the economy is getting weaker, is still not consistent with it.

UPDATE: The IMF issues an anodyne reaction to China's move which never acknowledges that their previous assessment is defunct, and Paul Krugman provides a sense of what's actually happening.

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