RMB Follies: Patience is a Virtue

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It’s been a fun couple of days watching world leaders and the foreign press get issue whiplash as they respond to the different signals put out by Beijing. On Saturday, when the PBOC came out with this surprising announcement about the RMB, everyone jumped in with an opinion:

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

No surprise, I suppose. That does sound exciting, if vague. Hours and hours of speculation followed, some of it breathless, with some commentators going so far as to predict specific values of the RMB six or twelve months out.

I didn’t write anything on Saturday or Sunday because it was simply premature to do so I’m lazy and it was the weekend. I did, however, enjoy reading all the happy stories, particularly those written by American journalists, about how this was a victory for the Obama Administration.

The minority opinion included cautionary tales from skeptics, with the usual suspects in Washington maintaining their disappointment with the RMB despite the news. Senator Chuck Schumer and others saw the move by Beijing as “too little, too late,” and called for a wait and see approach. This advice turned out to be the way to go. This story has changed quickly, a couple of times, and patience has turned out to be a virtue.

On Sunday, things became more complicated as Beijing appeared to take a step back from its earlier statement. The Guardian‘s Katie Allen summarized the entire affair thusly:

Beijing’s hints on Saturday that it would end a two-year peg to the dollar were initially welcomed as a positive step to redress unfair trading terms and end an approach attacked by many as currency manipulation. Analysts said that the move might also head off a potentially damaging trade row between China and the US at a G20 summit this week.

But in a follow-up statement to its “reform” pledge, made today, China ruled out a one-off revaluation and said there were no grounds for a big appreciation of the yuan. Those remarks left doubts over whether there would be any significant strengthening in the currency[.]

This of course allowed naysayers like Schumer to say “I told you so”:

Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off. It vindicates our initial scepticism[.]

So what the hell just happened over the weekend, and why? Well, first, let’s all admit that China’s Saturday statement about “reform” and “flexibility” was vague and that all the celebratory comments in response were irresponsible. A lot of folks got sucked into the excitement and are now pissed off that reality has set in. This explains petulant headlines like the one in the Wall Street Journal: China’s Yuan Head Fake.

My favorite description of this irrational exuberance is in a great post by Andrew Hupert (of the Chinese Negotiation blog):

Western commentators are once again connecting unnumbered Chinese dots to form the picture that they want to see.  The PBOC statement on Yuan flexibility says nothing about timing, direction –  or anything of substance having to do with the new RMB currency regime.  It may be the harbinger of a new Grand International Coalition, or it may be Orwellian doublespeak justifying anything Beijing wants to do.

Indeed. Everyone wanted to hear about a revaluation, and they read into the Saturday statement a bit too much.

Commentary from Sunday onwards has also included praise for China’s strategic prowess. Everyone was expecting China to get slammed by a number of countries at the upcoming “G20” meeting, and its Saturday statement may serve to blunt such criticism, if not forestall it entirely.

If this happens, then kudos to Beijing for making everyone look foolish. On the other hand, it’s probably not a good idea to needlessly annoy your trading partners. You never know when those chickens are going to come home to roost.

In looking at the G20 meeting as a focal point, commentators have taken two different approaches to China’s weekend moves. One opinion is that this is all a sign of Beijing’s weakness, that they had to act in the face of increasing international criticism, and this is their attempt to give up as little as possible. The other side sees the move as China’s vote of confidence in its economy, that things are sufficiently stable coming out of the recession that it can afford to make some moves on the currency.

I don’t see why both positions cannot be correct. Each makes sense. If China was positioning itself prior to the G20 meeting, then obviously it cares about international criticism. If one wants to call that “weakness,” I wouldn’t argue with that, although it’s basically irrelevant. Every nation has to be somewhat responsive to others, even North Korea. And yes, China probably wouldn’t even be discussion reform if its economy was in the toilet.

But in defusing criticism in this manner, Beijing is running some risks. Andrew Hupert identifies a downside to the Chinese maneuvering on this issue:

This time, however, Beijing may be outsmarting itself.  This is the second doublespeak manifesto to come out in 2 weeks – following close on the heels of the Internet White Paper  released on June 8.  Beijing is displaying a new tendency to spell out in black and white just how gray and subjective its standards are.  Chinese tacticians have always exalted ‘formlessness’ and misdirection, but after a while it becomes possible to benchmark deception.

It’s a good point, but while I agree that some nations may feel deceived, Beijing may well get off on a technicality. Saturday’s language was sufficiently vague. It will be difficult, particularly with the clarifying statements from Sunday, to accuse Beijing of outright deception on this issue. It doesn’t take much, after all, to implement “reform” and “flexibility.”

I’m now curious to see what will happen at the G20 meeting. If Beijing comes away relatively unscathed, then this weekend’s statements will be seen as strategic genius, at least in the short run. But even if that does happen, the long run is a different matter. If Beijing continues, as Hupert notes, to rely on these vague policy papers and then argue textual analysis like a top-end litigator, international criticism will not only continue, but it is likely to increase.