China’s central bank has burnt through nearly half atrillion dollars in foreign reserves to support itscurrency since August, despite criticism that it hasbetrayed its commitment to let market forces drivethe exchange rate.
Sources close to the central bank said theintervention, while costly, had been necessary tomaintain economic confidence and prevent a disorderly depreciation that could have hadripple effects far beyond the currency.
The People’s Bank of China has spent about $473bn of its foreign exchange reserves since itsurprised global markets last August by changing the way it set its daily guidance rate for thecurrency, according to Financial Times estimates based on official data.
Fears that China would permit or actively encourage a sharp devaluation led to a wave ofrenminbi selling after the move.
在中國央行這一改革之后,對中國可能允許或積極鼓勵人民幣大幅貶值的擔憂,引發了一輪人民幣拋售潮。
“The most important factor is confidence, both globally and within China,” said a central bankofficial. “The cost of intervention in terms of reserves has been high, but this policy can’t beevaluated just in terms of numbers. Once confidence is lost it can’t be easily restored. Then alot of bad things can happen.”
PBoC officials knew that changing the way the central bank set the daily “fix” would unleashpent-up depreciation pressure, but they underestimated the intensity of the marketreaction, according to analysts.
A move that might have been expected to produce a 5 per cent downward adjustment quicklythreatened to spark a 10 or 20 per cent rout in a matter of days. Such an uncontrolleddevaluation could have undermined the broader financial system by inciting investors to dumprenminbi assets en masse.
The International Monetary Fund is likely to address exchange rate volatility, among otherfinancial risks, when David Lipton, its deputy managing director, presents the fund’s annualfinancial stability report on China today in Beijing.