by Nomi Prins
As Zhou said, “We hope that the exchange rate can be kept basically stable, at a reasonable and balanced level through reforms.” He noted that market supply and demand would play a bigger role in determining the exchange rate going forward.151
To sustain the yuan’s internationalization progress, the PBOC had signed bilateral currency swap lines with more than twenty countries since 2009, including Switzerland, Brazil, Hong Kong, Indonesia, and South Korea. In contrast with 2012, when the yuan was fourteenth in the ranking of global payments by the Society for Worldwide Interbank Financial Telecommunication, it occupied seventh place in July 2014.
Zhou also had strong convictions about the role that gold could play in the monetary system. Because of the volatility of the yuan, the PBOC wanted better gold trading standards to avoid similar volatility in gold.152 In its Q1 Monetary Policy Report, the PBOC stated, “Rules for gold lending business on the Shanghai Gold Exchange and the development of a gold leasing business [were] promoted. Rules on OTC gold trading and trading by commercial banks on behalf of clients were improved to prevent risks.”153 China’s attraction to gold had waned somewhat, but holding it still represented a way to separate from the prevailing monetary system to the extent it could be added to some sort of a currency standard in the future. China’s demand and that of its growing consumer base that operated in concert with government aims would continue.
The United States, European Union, and Japan remained in sync on money-conjuring policy, the latter two with the effect of shielding their currency policies from US wrath. As for China, the United States had little tolerance, consistently repeating the broken-record accusations of currency depreciation (through to the Trump administration).154
So, on October 10, 2014, US Treasury secretary Jack Lew again warned global policymakers against interfering in exchange rates for competitive advantage amid growing strength of the dollar and slowing world growth.155 He asked that they “avoid persistent exchange-rate misalignments, refrain from competitive devaluation, and not target exchange rates for competitive purposes.”156
His speech followed a 6.7 percent gain of the dollar against ten major currencies since late June. But the dollar had strengthened so much because the Fed was rumored to be entering a rate hike phase as other central banks intervened in their currencies. Lew dogmatically urged China to let the market set the value of the yuan (which it still was doing): “It is critical that Chinese leaders implement reforms that move the country toward a market-determined exchange rate and address financial-sector risks.”157
In response to Lew, on October 10, PBOC deputy Yi Gang claimed that China had been constantly working toward a market-based yuan and that interventions over the currency had neared zero. “We are getting closer and closer toward our target of a market-based yuan rate; I am very confident that the yuan exchange rate is determined by market supply and demand.”158
Elsewhere, there were Western alliances to be made. On October 11, the ECB said it would discuss whether to add the Chinese yuan to its foreign currency reserves.159 Zhou was elated over the confidence vote. “It’s good that more countries are willing to adopt the renminbi as a reserve currency as our economy grows and our financial reforms continue.”160
Foreign conjecture had grown over Zhou’s possible departure. There were rumors of internal political squabbles over his advocacy for market reform amid China’s economic slowdown.161 But his appearance on an elite panel alongside Janet Yellen and other prominent central bankers Sunday morning, October 12, at a G30 meeting in Washington served to squash them. Zhou consistently proved himself a consummate politician in deflecting US ire over China’s policies, commanding global respect, and keeping his domestic government content. He wasn’t going anywhere.
On October 28, the Fed announced an end to growing the QE program it had begun in November 2008. But with European growth stagnant, the G20 picked up the slack that might result from a slowdown in the Fed’s global money conjuring. Leaders reunited in Cairns, Australia, and agreed to inject another $2 trillion into the global economy, which they said would create millions of jobs.162 They also claimed progress on protecting the world financial system.
Meanwhile, with China’s growth rate slowing to a more than five-year low that third quarter, on November 6, 2014, the PBOC unveiled its new tool to provide liquidity in lieu of a rate cut.163 It pumped RMB 769.5 billion (US$126 billion) into China’s lenders over two months through a medium-term lending facility, a kind of temporary bank that gave three-month loans to commercial lenders, reminiscent of the kind the Fed established for the US banking system in 2009. China, because of the recent economic slowdown, now had money-conjuring tendencies, too.
Two weeks later, on November 21, the PBOC also cut its one-year deposit rate to 2.75 percent from 3 percent.164 “The Chinese economy is running within the proper range and positive signs have emerged in economic restructuring. However, high financing costs and obstructions still remain prominent problems for the real economy,” said the PBOC. “Reducing high financing costs for enterprises, small and micro-firms in particular, is of great importance to stabilizing economic growth, job creation and the benefit of the people.”
It was the first cut since 2012 after figures showed China’s factory output contracting. As for the economy, President Xi told chief executives at the Asia-Pacific Economic Cooperation Summit that the risks faced by China were “not that scary” and that the government remained confident. He correctly remarked that even with China growing just 7 percent in the next year—its slowest pace in twenty-four years—it was still growing more than other economies.165
Xinhua, the state media, added support, underscoring the changing demographics in China’s economic growth picture and its global financial market victories. Alibaba, China’s expansive version of Amazon, for instance, had set a record for the largest IPO in history in September 2014.166
But the economy was slipping. A month later, on December 10, new data revealed the slowest export growth for China in seven months.167 In addition, five-year sovereign bond yields had risen the most since November 2013. In response, the PBOC intervened to set the strongest yuan reference rate since March 7.
Overall, though, the yuan fell 2.4 percent in 2014, the first annual decline since 2009. According to PBOC deputy governor Hu Xiaolian, the PBOC was pressing ahead with exchange rate liberalization and had withdrawn regular intervention. Therefore, any credit for the depreciation of the yuan belonged to speculators and was not the fault of the PBOC.
But beyond currency levels lay the more pressing matter of the distortion of the market by G7 central bank money-fabricating policies. As Zhou noted at the Tsinghua PBCSF Global Finance Forum in Hong Kong in December 2014, “Central bankers would have to rely on quantity-based monetary easing where price-based tools such as interest rates have reached the bottom. The three rounds of QE and Operation Twist168 led to the largest expansion of the Fed’s balance sheet since World War II, doubling to $4.5 trillion within the past five years.”169
YEAR OF THE SHEEP
By 2015, emerging nations were struggling because of low commodities prices and China’s reduction in demand. The nature of those effects differed across countries. Brazil, in particular, faced its worst days in years owing to a weak economy, currency depreciation, and political scandal. Russia was hurt by lower oil prices and sanctions, which dampened the ruble’s value. Argentina had elected a president who promoted economic liberal reforms and a potential political inversion regarding Latin America’s political and economic path. The global political turn to the right gained steam as people lost confidence in their sitting governments.
On May 9, 2015, a day before the seventieth anniversary of the World War II victory, Presidents Vladimir Putin and Xi Jinping again convened in Russia.170 China was one of Russia’s main trading partners. They signed two more joint declarations on financial cooperation two months after yuan-ruble futures began trading on the Moscow stock exchange. Russia’s ma
in bank, Sberbank, agreed to provide credit lines in both currencies to Chinese banks.
China’s elite had fought against the prevailing monetary system since the financial crisis and embarked upon securing regional and international trade and economic alliances beyond the United States. Another element of China’s ascension and independence was the New Development Bank (formerly the BRICS Development Bank). The NDB opened its headquarters in Shanghai on July 21, 2015.171 It was a momentous occasion, marking the first time a developing markets development bank was created by and for developing countries.
The first NDB president, K. V. Kamath, hailed from India. Its four vice presidents were appointed from the other countries: Xian Zhu from China as chief operations officer, Leslie Maasdorp from South Africa as chief financial officer, Paulo Nogueira Batista Jr. from Brazil as chief risk officer, and Vladimir Kazbekov from Russia as chief administration officer.
Shortly after the establishment of the NDB, in August 2015, the yuan underwent a 4 percent devaluation. The sharp decline followed a mini stock market crash: after having rallied by 150 percent over the prior year, the Chinese stock markets took a dive.172 Since June 12, the Shanghai Stock shed about one-third in overall value, or $3 trillion worth of losses, causing about half of its fourteen hundred listed companies to file for trading halts to protect themselves from more losses.173 The tenuous episode provoked a sense of panic throughout the speculator community, on fear of contagion or the onset of a global recession, as well as skepticism regarding China’s attempts to fashion Shanghai as a major global market force along the lines of New York or London.
But movement on the yuan pressed forward despite the market volatility. On November 30, the IMF completed its five-year review of the special drawing rights basket and decided to include the renminbi.174 The IMF had created the SDR as an international reserve currency asset in 1969 to supplement its member countries’ official reserves. The value of the SDR, at the time of that decision, was based on a weighted basket of four major currencies—the US dollar, the euro (which replaced the deutschmark and French franc upon its 1999 creation), the Japanese yen, and the British pound sterling. The inclusion of the renminbi would take effect in October 2016, enabling the RMB to finally attain its status as an official international reserve currency, beside the US dollar, euro, British pound, and Japanese yen.
Two weeks later, on December 17, 2015, the China-Russia monetary alliance inched another step closer. Zhou and Central Bank of Russia governor Elvira Nabiullina signed a memorandum of understanding (MOU) and cooperation “to improve and deepen bilateral financial cooperation.”175 The momentous agreement was a direct outcome of the meeting that occurred in Beijing between Chinese premier Li Keqiang and Russian prime minister Dmitry Medvedev. It was a different kind of collusive move. According to the statement, “The goal of the MOU is to develop cooperation between the central banks in the spheres of mutual interests, including promoting local currency settlement; to continue cooperation in the areas of payments and bank cards; to facilitate the access of one party to issue local currency bonds on the territory of the other party; and to enhance cooperation in credit rating.”
The two central banks shared a criticism of the US dollar as the main reserve currency and, by extension, the Fed as monetary policy leader. Although China and Russia had different ways of approaching this US power position, they agreed on the need for alternatives to the current international monetary system.
Meanwhile, the yuan continued declining relative to the dollar, which was good for China’s trade, but not so good for US and China politics. The first half of December 2015 was characterized by a 1.3 percent devaluation in the yuan.176
Chinese exporters—as well as European and American importers—were happy. However, Chinese exporters were worried, especially if the yuan’s level should translate into higher costs for imported raw materials and production. Into that weakness and uncertainty, the Fed’s decision to raise rates by 25 basis points in December 2015 prompted US dollar gains. Initially.
The perception the Fed attempted to promote and the US media spread was that after seven years of “emergency measures” money-conjuring policy had proven effective. The US dollar rose on this notion. But the decision to adopt such a slight change in monetary policy showed caution regarding the US economic capacity to recover. Plus, a higher dollar might cause tremendous pain to countries whose private sectors were laden with dollar-denominated debt. Despite the fanfare, though, and the Fed’s forecast of four more interest rate hikes during 2016, it would be the last increase for a year.
YEAR OF THE MONKEY
Chinese stocks took another plunge between January 4 and 7, 2016.177 They were not alone. All of a sudden, turbulence returned. Stock markets had become dependent on the West’s (and Japan’s) money-conjuring policies, and the Fed’s rate hike disrupted their party. It was unthinkable that the Fed’s money conjuring could come to an end.
Emerging markets, particularly China, bore the brunt of that realization. Speculative capital raced for its home base, and China was not a home base. If the mini crash in the summer of 2015 in China’s markets had taught foreign bettors anything, it was that financial markets could always get much worse before they got better. With the Fed in potential tightening mode, even slightly, money flow could become constricted, and that was not a bet they were prepared to take.
The yuan also took a dive.178 This was not what the Fed had intended when it raised rates. Nor did it comport with US government initiatives to dictate China’s rate and currency decisions. But China had to protect China. Zhou was well aware of his responsibilities to the People’s Republic.
According to Chinese media, the devaluation was part of the effort to stabilize the yuan’s international parity. Moreover, the IMF supported it.179 The United States criticized the action because it rendered Chinese exports cheaper, but China asserted that exports were low because of the reduction of global demand. The battle had not died between the two superpowers.
The consequences were record losses in the offshore currency market. The yuan fell by 3.5 percent against the yen and by 0.8 percent against the euro. Chinese stock markets were suspended twice that first week of January. Japan’s Nikkei fell 2.3 percent, and Hong Kong’s Hang Seng dropped 2.8 percent.180
Headlines like “China’s slowdown continues to drag, slowest since the global financial crisis” became Western lore, though within the copy beneath them there resided competing facts such as “China slowdown not as bad as feared.”181 Concern over liquidity drying up was not about a slowdown in economic growth but was fear that the global collusion to conjure cheap money would end. If a major participant stopped, what would happen to cheap capital flows? It was unclear which part of the world would take up the baton. The Fed could exit the money-conjuring game. But China was not in the game enough. All China had to do was prove it could be a player, and capital would flow eastward again. So, this time, without hesitation, that’s what Zhou set out to do.
On January 11, 2016, PBOC chief economist Ma Jun agreed to an interview with Chinese newspapers and the Financial Times regarding the sharp depreciation of the RMB against the US dollar.182 According to him, the Chinese exchange rate mechanism formation was not pegged to the dollar. He announced that “China will guide the market to form a yuan/dollar rate,” anticipating a more flexible exchange policy.183 It was the PBOC against the markets, defending its own power as much as the yuan’s strength in the world.
However, the 1.5 percent yuan depreciation since the start of 2016 combined with the 4.7 percent weakening in 2015 sounded to China trade rivals as if China was entering a new “currency war” of competitive devaluations.
On January 19, the IMF released its World Economic Outlook global growth report. On the one hand, it boosted its forecast to an increase of 3.4 percent in 2016 from its estimated 3.1 percent in 2015. Forecasts regarding developed markets were positive, whereas emerging markets had problems that could be exacerbated by lo
wer commodities and oil prices. The larger issue, though, was the shift in Fed policy and cheap money.
The report stated, “Prospects of a gradual increase in policy interest rates in the United States as well as bouts of financial volatility amid concerns about emerging market growth prospects have contributed to tighter external financial conditions, declining capital flows, and further currency depreciations in many emerging market economies.”184
On January 21, in Davos, Fang Xinghai, vice chairman of the Chinese Securities Regulatory Commission, affirmed China was not trying to restore its economic growth by devaluing the renminbi. According to Fang, “A depreciation is not in the interests of China’s rebalancing; a too deep currency fall would not be good for [domestic] consumption.”185
Fearing global contagion more than currency devaluation for a moment, US secretary of the Treasury Jack Lew offered confidence in China’s markets. He had “been following China very closely” and did not see “the situation today as being so dramatically different” from that at the end of 2015. He was basically trying to cover up the chaos that the slight Fed rate hike in December 2015 had caused markets and was extending an olive branch to China.
The following week, after reaching a thirteen-month low, the yuan recovered. China was trying to bolster confidence in the yuan after it fell 5.7 percent since August 2015. An editorial in China’s People’s Daily ironized it as George Soros’s attempt to “declare war” on China’s yuan and the Hong Kong dollar.186 The January 27 piece accused Soros of attempting to bet against the yuan. A few days earlier, at the Davos World Economic Forum on January 21, 2016, Soros had told Bloomberg TV that a “hard landing” for the Chinese economy was “unavoidable.” This tack was reminiscent of one that his funds had taken when he bet against Asian currencies in 1997. Soros told Bloomberg TV that he had bet against the S&P 500, Asian currencies, and commodity-linked economies.187