HONG KONG — One of the surest bets on China is starting to look a bit shaky.
For the past nine years, each business day at 9 in the morning, government workers in the blandly named Building No. 30 in Shanghai’s Pudong financial district have published a benchmark number that tells the world what their country’s currency will be worth that day, compared with the US dollar.
More often than not, the staff of the China Foreign Exchange Trade System has assigned a value to the currency, the renminbi, slightly stronger than it had finished the previous day. Thanks to the guiding hand of the Chinese state, the renminbi today is about 25 percent stronger than it was in July 2005, when China scrapped the currency’s fixed peg to the dollar in favor of a steady, crawling appreciation.
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But recent developments suggest such strengthening is no longer the certainty it once appeared to be, and Beijing is taking pains to show that China’s currency is not just a one-way bet. This year, the renminbi has reversed course, weakening 1.6 percent against the dollar. And Saturday, the central bank, the People’s Bank of China, said that beginning Monday, it would allow the currency to climb or fall as much as 2 percent per day against the dollar, compared with 1 percent previously.
Widening the trading band “will further drive away speculators betting on a one-way appreciation of the Chinese yuan, thanks to the possible bigger and more frequent exchange rate fluctuations,” Tan Yaling, president of the China Forex Investment Research Institute, told Xinhua, the state-run news agency, on Sunday.
Yuan is another name for the renminbi.
This newfound volatility and uncertainty over the currency are just one area where, despite recent economic data suggesting that growth is decelerating to its slowest pace in over a decade, China is pushing ahead with a campaign of wide-ranging financial overhauls. If carried out, they are likely to redefine the nation’s state-driven growth model and to reverberate in economies far beyond China’s borders.
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Freeing up interest rates, internationalizing the currency, and modernizing the financial system are all on the agenda.
On Thursday, China’s premier, Li Keqiang, said the government’s top priority for the year was to push ahead with financial overhauls. Economic growth could come in above or below the official target of 7.5 percent, he said, which would represent a slowdown from the 7.7 percent rise in gross domestic product last year.
Regardless of this, China will “carry out the reforms without hesitation,” Li pledged, adding a warning that “in the course of reforms, the vested interests will be shaken and some people’s cheese will be moved.”
A key risk for companies and countries that do business with China is not that Beijing will balk at restructuring its economy if growth slows beyond a certain point; it is that policy makers will stay the course.
Over the years, China’s investors and trade partners have come to rely on what amounts to a “Beijing put,” an option that provides assurance that a minimum level of growth will be attained. When the country looked set to fall short of this level, the government would intervene to prime the pumps — freeing up credit, introducing subsidies, and otherwise ensuring that China avoided any real economic pain and remained on track as the world’s fastest-growing major economy.
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Yet in the face of apparently slowing growth, this implicit guarantee is showing signs of unraveling. Markets around the world are getting spooked, from Australian iron ore miners to the luxury fashion houses of Europe to US scrap exporters.
This month, a small producer of solar panels based in Shanghai failed to pay the interest on a bond worth $163 million. It was the first default in China’s onshore corporate bond market in recent history, and it sent shock waves through global copper markets.
Investors are worried that Chinese buyers who imported copper purely for financing purposes could be forced to sell, and prices of the metal have plummeted on fears that hundreds of thousands of tons of copper could begin to flood global markets as a result.
So far, the Chinese leadership is showing no signs that it shares these fears. Indeed, analysts have said that allowing a struggling company to default instead of rushing in with a government bailout is a necessary form of near-term pain if China’s 8.5 trillion renminbi corporate bond market is to mature and develop over the long term.
Still, policy makers made it clear that by stepping back from the market, the government was not stepping out of the picture entirely.
“Market participants should view fluctuations in the exchange rate rationally and respond proactively,” China’s central bank said in a statement posted on its website Saturday. “Of course, if the exchange rate sees large or abnormal swings, the central bank will carry out the necessary adjustments and supervision in order to protect the normal floating exchange rate of the renminbi.”
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