Thirdly, Dowey said China can change its exchange rate policy, allowing the RMB to depreciate against the US dollar in the face of US dollar strength. Given the authorities’ reluctance to allow the RMB to float freely, they should instead ‘manage it against a basket of major currencies’ rather than the dollar alone.
Dowey said in his view the market has reacted so negatively to RMB depreciation against the US dollar, both during last summer’s episode and during the past week because of a ‘trust issue’ with the Chinese government.
“The market supposes that there is a significant chance that rather than duly following the prescription of the economics textbook, the Chinese government has simply lost control, with currency weakness being a manifestation of the demise,” he said. “This is understandable given the poor quality of Chinese economic data, government policy opacity and the folly of the government’s attempts to control the stock market since last summer, which have hurt its credibility. However, I do not think it is the correct interpretation of what is going on in China.”
