China’s Leaders Talk Up Embattled Yuan Before G20 Summit

February 25, 2016, 9:36 AM UTC
Renminbi banknotes are placed on a bank staff's table in a bank in Lianyungang, east China's Jiangsu province on August 11, 2015. China's central bank on August 11 devalued its yuan currency by nearly two percent against the US dollar, as authorities seek to push market reforms and bolster the world's second-largest economy. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/Getty Images)
STR AFP—Getty Images

Chinese policymakers on Thursday ruled out an imminent devaluation of the yuan as they seek to reassure trading partners ahead of the G20 summit that they can manage market stability while driving structural reforms.

Comments from senior economic policy officials and industry leaders come as finance ministers and central bankers from G20 nations prepare to meet in Shanghai on Friday and Saturday. Current market turmoil and a global economic slowdown are expected to be key topics of discussion.

Overhanging the summit are wider criticisms from the global economic and investment community about China‘s record on managing its currency and markets and effectively communicating policies to financial markets.

Earlier on Thursday, the official China Daily newspaper reported, quoting finance minister Lou Jiwei, that a proposal to devalue China‘s yuan, also known as the renminbi, was not on the agenda for G20 summit.

Zhu Guangyao, vice finance minister, said that China would seek to keep the exchange rate stable while maintaining its current “managed float” regime. China‘s current foreign exchange management theoretically allows market forces input into the way the yuan is priced against other currencies.

“We do recognize the risk the global economy faces,” he said in English at a conference held by the Institute of International Finance linked to the G20 summit.

“We also understand how important it is to correctly communicate with the market,” he added.

A more than 6% drop in China stocks on Thursday, their biggest one-day loss in a month, highlighted the volatility that has roiled the country’s financial markets over the past nine months.

Key global policymakers have been blunt in their assessment of China‘s ability to manage its domestic markets.

“You have to communicate clearly publicly or it will be interpreted for you,” U.S. Treasury Secretary Jack Lew said in an interview with the Wall Street Journal on Thursday.

Lew said China must also make it clear that there is no “major devaluation” in the pipeline.

The People’s Bank of China (PBOC) devalued its currency in August, arguing it would allow the market to reset at its natural level. But investors have continued to move out of the currency since and the exchange rate has slid further.

Since then, investors have complained that the Chinese central bank’s communication strategy is too secretive, a concern PBOC chief Zhou Xiaochuan has attempted to publicly allay.

Zhu’s statements echoed similar comments made by industry leaders and policymakers at the IIF conference on Thursday that flagged the country’s apparent efforts to embrace market reforms.

Jiang Jianqing, chairman of the Industrial and Commercial Bank of China (ICBC), the country’s largest bank, said there is no market basis for further yuan weakness.

While this dovetails with previous statements by regulators and central bankers in China, such calls in the past have had little impact in fending off bearish pressure.

The yuan has been particularly hit, with famous international investors like George Soros publicly arguing that the currency is set to decline further.

Balancing Act

Chinese central bank vice governor Yi Gang on Thursday said investors can expect more yuan fluctuations against the dollar as the PBOC puts more emphasis on measuring the currency’s value against a basket of currencies.

The result would be more volatility for the yuan against the greenback but more stability generally against other currencies.

“A stable situation is good for everyone, I think,” Yi said, speaking in English at the IIF conference.

“If we have a relatively robust growth rate, we have a market-oriented exchange rate, but at the same time we still have an anchor…this will be good for everybody.”

Yi also said China still enjoys an independent monetary policy—something some analysts believe is at risk given rising capitalo outflows—and can thus can still control domestic interest rates.


Like other economies, China is struggling to balance short-term stability with structural reforms that might risk generating unemployment and social unrest, and many economists are skeptical that much can come from the G20.

A report published by the International Monetary Fund (IMF) on Wednesday called for a coordinated stimulus program to support a slowing global economy.

“The G20 must plan now for coordinated demand support using available fiscal space to boost public investment,” IMF staff said in the report.

The Shanghai meeting is already being compared with the G20 meeting in April 2009 when officials agreed on coordinated stimulus to prevent a worldwide depression during the global financial crisis. However, few expect this year’s conference to produce similar results.

“Calls for co-ordinated policy easing ahead of this weekend’s G20 meeting will almost certainly come to nothing,” wrote Andrew Kenningham, senior global economist at Capital Economics in London.

China, however, appears to be positioning itself for aggressive fiscal stimulus, hoping it can migrate its economy away from overdependence on low-end export manufacturing to something more sophisticated without setting off a wave of layoffs, a balancing act the PBOC’s Yi described as “delicate.”

Vice finance minister Zhu also said that China had room to increase its fiscal deficit this year, with one PBOC researcher writing in an article that the deficit could exceed 4% this year.

Additionally, China‘s move to open up the bond market to more foreign investment is seen by some analysts as a sign Beijing will continue to open its capital account.

“Potential foreign inflows would help to absorb the net central government bond supply, which we estimate will rise by 15% to 2 trillion yuan this year,” HSBC analysts wrote in a research note.