Keeping the yuan stable? (The PBOC dilemma)

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  • WSJ, Jan. 25th, 2016: China Can’t Paper Over Yuan-Policy Contradictions

  • Reuters: Japan, China seek new dialogue on yuan: "Japan and China are working to create a new framework to bring together government and central bank officials to discuss economic policy coordination, such as steps to stabilize the yuan, the Nikkei newspaper said on Tuesday."

  • FT, Jan. 25th, 2016: Capital controls may be China’s only real option

Policymakers have now made it explicit that they have no wish to engineer a big devaluation. However, they are much less forthcoming about how they plan to reconcile a desire for currency stability with the realities of capital flight and a slowing economy.

  • WSJ, Jan. 24, 2016: China’s Central Bank Prioritizes Strong Yuan When Managing Liquidity

Ms. Zhang told officials at the meeting that the combination of cuts to interest rates and reserve requirements made by the central bank in late October contributed to the pressure on the yuan. “Because of the double reductions, there was too much liquidity and depreciation pressure on the renminbi,” she said.

Ahead of Tuesday’s meeting, China’s big banks called on the central bank to cut the reserve requirement in the lead-up to the holiday. But the central bank balked at doing that because of worries over the stability of the yuan, the banking executives close to the PBOC said.

In August, officials allowed the currency to depreciate about 2% against the U.S. dollar and laid out a new strategy to fix it each day based on its performance within a narrow band the previous day. The idea was to give market force more sway in the rate.

In December the central bank signaled ... its intention to move toward navigating the currency against a basket of currencies, even while maintaining a band.

[A] touch of volatility could make betting against the yuan more expensive, and tamp down the flow of money heading out of the country—a problem for China in recent months.

In the first weeks of this year, for instance, the PBOC has steadily guided the price of the yuan down, then intervened heavily to bring it back up when it thought speculators were pushing down the value too fast. “The yuan is increasingly unpredictable, and that is exactly what the PBOC wants to achieve,” says Larry Hu ...

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