Scott Sumner  

Free the yuan

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A few days ago I did a post suggesting that the Chinese government needed to devalue the yuan. Today (or last night) the Chinese government took a modest step in that direction:

China said it will let the market play a bigger role in setting exchange rates and allow more flexible movement of the nation's currency.

The People's Bank of China will maintain stability of the yuan "at a reasonable equilibrium level," it reiterated in its quarterly monetary report released Friday.
. . .

The central bank will also ensure appropriate liquidity supply with multiple policy tools, according to Friday's statement. It will continue to improve the Shanghai interbank offered rate and loan prime rate as part of efforts to create a market-based interest rate system.


This news seems to have been positively received by the equity markets, although I'm not certain about the timing, and would appreciate any further information people might have:

Slowing demand in China led some stock markets to rise on Monday, on hopes of more policy stimulus, but commodity prices fell. . . .

Chinese producer prices in July hit their lowest point since late 2009 and exports tumbled 8.3 percent in the same month. That stoked expectations of more action from the central bank after months of intervention by the authorities to tame China's unruly stock market.

"Expectations of further easing are building and announcements of liberalisation have boosted the equity market," said Kit Juckes, senior FX strategist at Societe Generale in London.


In recent weeks the Chinese government had been foolishly trying to treat the symptoms of falling NGDP growth, by intervening in the stock market. Now they seem to realize that they need to do something about the root cause of the problem, tight monetary policy caused by the yuan's peg to a sharply rising dollar. Chinese stocks rose almost 5% today, although this should be interpreted with great caution, as government buying has distorted the market.

Policymakers need to provide a stable monetary environment (stable NGDP growth) and let the markets decide the exchange rate, and the proper level of stock prices.

HT: TravisV


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COMMENTS (4 to date)
TravisV writes:

Prof. Sumner,

Thank you very much!

Occupy The IMF!

http://www.themoneyillusion.com/?p=11492

ThomasH writes:

Same could be said for the US, adding "inflation."

awp writes:

"Slowing demand in China led some stock markets to rise on Monday, on hopes of more policy stimulus, but commodity prices fell. . . ."


This right here is why I hate "economic" reporting, they just need a story no matter how much nonsense they spew.

James Hanley writes:
Policymakers need to provide a stable monetary environment (stable NGDP growth) and let the markets decide the exchange rate,

I have a question about this, because I have an obscure academic interest in Belize, which pegs its currency at 2 Belizean dollars to 1 American dollar. Accepting your point as generally true, I wonder if the peg is a good policy or not for Belize.

On the contra side to your generally applicable argument, Belize is heavily dependent on U.S. tourism, and I wonder if the peg might reassure investors that they don't have to worry about a central bank that's suddenly going to go for hyperinflation.

Thoughts?

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