2012-03-14

Pieces in place for yuan decline

China to speed FX reform, allow freer yuan trade: Wen
China will intensify reforms of its currency regime and allow the yuan to float more freely, Premier Wen Jiabao said on Wednesday at the end of an annual parliament session punctuated by signs of a slowing economy.

"In the Hong Kong market, NDFs (non-deliverable forwards) have started to fluctuate both ways. This tells us the yuan is possibly near a balanced level," Wen told a news conference on the last day of the 2012 National People's Congress meeting.

"We will step-up exchange rate reforms, especially in increasing two-way fluctuations," the 69-year-old Wen said at his last annual post-parliament news conference.
China's reform pace was a bit slow, but rushing currency reform can lead to crisis. However, the country should have moved more quickly to appreciate the renminbi so that the past four years could have been used to rebalance the economy. Instead, the export sector is too large and bad debts stalk the banking system. Once China opens the door to a more freely floating yuan, it can't put the genie back in the bottle. They could retreat in the face of unwanted volatility, but slamming the door on a rising yuan would stir political trouble in the U.S., while cutting off a rapid drop in the yuan would signal to markets that a major crisis is afoot.

Like all central planners, the Chinese communists believe their own message and think they have it figured out. With central bankers and bureaucrats in Europe, Japan and the United States also thinking they've got a better solution than markets, disaster is coming, especially once the yuan can more fully express market forces, rather than the dictates of central planners.

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