China’s facing trilemma
The number one banker of China, Zhou Xiaochuan, as well as other top country’s chiefs have just initiated an ambitious communications offensive in order to convince overseas policymakers as well as markets that the country isn’t planning any considerable devaluation of its national currency.
The broad attention of world markets was primarily focused on the Asian country’s exchange rate, when in August the China’s central bank officially announced a 1.9% devaluation of the national currency the greenback, simultaneously dropping a hint at how the exchange rate would be raised or lowered in the nearer future. Well, since August’s devaluation, the PBOC continued its manipulations with the Yuan. So, the Chinese Yuan has been recently allowed to descend another 3.6% against the evergreen buck, and it feels like financial markets have already put up with this PBOC’s policy of ongoing devaluation of the national currency.
In general, the country’s capability to avoid another strong wave of the Yuan’s devaluation in the midterm will mostly depend on several factors and one of them deals with China’s alternative policy choices.
China is currently facing a classic trilemma. So, China can’t pursue more than two of these three at the same time. We’re talking about an independent monetary policy, a fixed change rate, not to mention free international capital flows. As for the Asian country’s ability to manage its exchange rate, it may depend on other crucial factors, including its ability and willingness to adjust on other promising policy margins.