China Stabilizing the Yuan Is Remarkable. That's Weird.

(Bloomberg Opinion) -- Trade conflicts may not be as easy to win as Donald Trump asserts. His principal target, China, is the victor in the war of public relations.

From economics to markets to statecraft, China these days is seen as the stabilizer and America as the disrupter picking fights.

This week the People's Bank of China was widely praised for its vow to keep its currency stable. This "verbal intervention" signaled that the central bank didn't want an extended slide in the value of China's currency, the yuan, and that the government won't weaken the exchange rate to gain advantage in its trade tussle with the U.S. The head of the central bank's financial research institute added that "China upholds multilateralism, globalization, free trade and rule-based international guidelines."

Good for China. That's exactly the line the world's largest exporter and second-biggest economy should take. But the applause that greeted the comments Tuesday tended to miss the point: The yuan is a heavily managed currency, far more so than that of any other major economy (and a great number of smaller ones, for that matter). Very little happens that the PBOC doesn't want to happen. It exercises significant control, even in calm times. This is not the "invisible hand" of the free market.

The notion that the PBOC somehow launched a major intervention or initiated a huge change in the market neglects a ton of context. This isn't like Federal Reserve Chairman Jerome Powell or European Central Bank President Mario Draghi woke up one morning and decided they were going to draw a line under the dollar or the euro. Even Japan, which used to nudge the yen around, has long withdrawn from active participation in the market.

The PBOC sets a daily reference rate for the yuan after receiving submissions from lenders. The currency is allowed to fluctuate within a daily limit of 2 percent either side of that reference rate. In practice, it's rarely even remotely close to 2 percent. (From time to time, the banks are instructed to change the way they calculate their submissions to the daily reference rate, sometimes known as the fixing.) The government also keeps strict control over capital inflows to and outflows from China.

China has made important strides in allowing flexibility over the years. Until 2005, the yuan was fixed at about 8.3 to the dollar. In July of that year, the PBOC began allowing daily moves of 0.3 percent and has steadily — if slowly — widened that trading band. China also allowed the yuan to fluctuate against a basket of currencies; more often than not, the dollar rate has been the one to watch. Over time, China became more comfortable with letting the yuan gradually appreciate or decline. The moves can incrementally add up: As of Tuesday, the yuan was the worst-performing currency in Asia over the past three weeks. It's down 2 percent this year.

Taking a longer perspective, the currency is about 20 percent stronger since the hard peg was scrapped. Kudos to China for the steps taken to date. Beijing does allow changes and markets play a bigger role than they did. That doesn't mean authorities are absent and that yuan trading should be characterized in a way that remotely resembles the way we talk about the dollar, the euro, the yen, the pound, the Canadian dollar and so on.

As China's capital markets grow and foreign investment in them increases, the PBOC and the yuan are also bound to evolve. In the meantime, let's dispense with the idea that intervention is somehow new.

Only the new unreliability of the U.S. even makes China's intervention remarkable.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

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