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China Announces It Will Fix the Price of the Yuan at a Basically Stable Level

Let's discuss the meaning of stability and how it should be achieved.
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Reflections on Basically Stable

ForexLive reports PBOC says it will maintain the exchange rate of the yuan at basically stable levels.

Comments from Liu Guoqiang, a vice governor at the Bank (emphasis mine)

  • China will maintain the exchange rate of the yuan at “basically stable” levels
  • Trend of the exchange rate will be decided by supply and demand along with changes in international financial markets
  • Yuan will be kept at reasonable and balanced levels

Did You Catch the Contradiction? 

The pledge to peg the yuan to "basically stable" and "reasonable and balanced levels" is anything but a supply and demand market-driven floating rate. 

Moreover "reasonable and balanced" can mean anything. In practice it will mean whatever the heck China wants it to mean.

ForexLive also noted April 16 comments from Zhou Chengjun, director of the Bank’s finance research institute.

  1. China has to give up its control over the yuan exchange rate eventually if it wants to achieve greater global use of the yuan
  2. The PBoC has made it clear it stopped regular intervention
  3. China will let the market play a bigger role in deciding the exchange rate.

Points number 2 and 3 will only hold true so long as China concurs the Yuan is at "reasonable and balanced levels".

Meaningless Announcement

Defending a hard peg means whatever it takes. 

But Basically and reasonable can and will mean anything China wants, so it's not quite a hard peg.

One clear possibility is that if the dollar sinks vs the Euro, China wants the Yuan to sink with it.

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The announcement is a meaningless cop-out and easy to see through.

The only thing that makes any sense is point number 1. But go back and read that sentence carefully.

Please note the word "eventually". Strike that from the sentence so it reads properly. 

What's China Doing?

China wants everyone to believe it is on the verge of letting the yuan float, driven by market forces. 

Obvious contradictions and words like "eventually" prove otherwise. 

What a joke announcement. China tried to fool everyone with meaningless words.

Weight Fixing

What the world needs is not "price fixing" but "weight fixing". 

A dollar, yuan, euro, or yen needs to represent a fixed weight of gold, audited, and 100% redeemable on demand. 

This is vastly different than saying "x" dollars will buy "y" gold given that dollars can be printed at will. 

Such pegs can't last, and the soaring price of gold from $35 an ounce to $1900 an ounce is proof enough. 

True Stability

A 100% gold-backed dollar, by weight, implies no government or central bank shenanigans. That's true stability.