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China Says They Have No Reason for Further Yuan Depreciation
02/26/2016 9:33 am EST
However, China has broken its promise before, so Michael Berger of Technical420.com maps out the reasons behind why many leaders feel the market would benefit from more communication—and clearer communication—from China.
The markets have responded favorably to the announcement by China’s central bank that there is no reason for further currency depreciation.
Although this news is exciting, China has broken its promise on this issue several times over the last year. So what has changed? Why should the markets believe China this time?
The answer to this question is not so simple. Even though China has broken its promise before, they have at their disposal the monetary policy tools needed to stimulate their economy.
Monetary Policy Tools to Address Downside Risk
At the Group of 20 meeting in Shanghai, People’s Bank of China Governor Zhou Xiaochuan said, “China still has some monetary policy space and multiple policy instruments to address possible downside risks.”
While Zhou had remained silent in the months after a surprise currency devaluation in August, he’s come roaring back into the public eye this month. Since October, China has kept benchmark interest rates at record lows as they inject liquidity into the markets and guide interest rates lower as they shift to a market-based monetary framework.
A Change in Tone
Earlier Friday, The People’s Bank of China published a statement which defined its current policy as prudent with a slight easing bias. This is a change from how China’s central bank had previously defined its policy: prudent with reasonable, ample liquidity.
More than $6 trillion has been erased from the value of global equities since the start of the year and everyone, rich or poor, has been affected by this. China’s slowdown has created a ripple effect as other markets have been affected by weak commodity prices and increased concerns pertaining to debt repayment from oil producers.
Market Calls for More Clarity from China
Leaders from Wall Street to Washington continue to ask China to improve the way it communicates to the world. Economic leaders such as International Monetary Fund Managing Director Christine Lagarde and Treasury Secretary Jacob Lew have also asked for better communication from the world’s second-biggest economy.
The market would benefit from more communication and clearer communication from China. In turn, this would improve transparency and reduce overall market volatility as there would be fewer of such surprise announcements.
Michael Berger, Founder and President, Technical420.com
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