…the move to change the daily fixing mechanism is a step towards renminbi liberalisation as China moves towards the Impossible Trinity paradigm, where the opening of China’s capital account is forcing it to choose between retaining monetary autonomy (or controlling the interest rate) and controlling the exchange rate. Clearly, Beijing is choosing to retain monetary autonomy by letting go of the exchange rate.
This is the preferred choice because China’s large continental economy will allow it to conduct more effective monetary policy than small open economies, such as Hong Kong and Singapore, where international factors often overwhelm the influence of domestic monetary policy.
This means that opening the capital account, or the advent of Impossible Trinity, is forcing China to pursue a major overhaul of its economic, financial and policy frameworks. Beijing’s move to reform the fixing regime is another step to making that change. It also has a strategic goal of boosting the likelihood of the renminbi becoming a reserve currency by directly addressing the IMF’s concern about the renminbi’s inconvertibility.
Beijing is campaigning to add the renminbi to the currency basket that forms the IMF’s Special Drawing Rights (SDR), which is a fast-track for the renminbi to become a reserve currency. The ultimate importance of the SDR for China is that it is a signpost for China’s capital account liberalisation and, hence, structural reform progress.
The IMF staff report in early August highlighted that a more market-based valuation of the renminbi rate against the US dollar would be needed as a key factor for considering the renminbi’s inclusion in the SDR basket. This could well have been the trigger for Beijing changing the renminbi fixing regime on 11 August. If the renminbi is to become a reserve currency, it must be priced in its own rights rather than simply being a minion of the US dollar.
Beijing’s reform of the fixing regime shows it believes it is time to sever the renminbi’s tie with the US dollar. Arguably, this is a statement of confidence rather than a sign of weakness.
Meanwhile, Wal-Mart is closing stores:
And nobody wants to spend money to move freight around: