You have all seen the headlines.  They are everywhere.  It's the lead story in today's edition of The Wall Street Journal, where the banner reads "China Acts to Devalue Its Currency."   And as with any major development, everyone has an opinion.  Today's quote focuses more on the artistry of the exercise than on the outrage, and it is from an expert. 

Eswar Prasad is the Tolani Senior Professor of Trade Policy at Cornell, a former head of the China division at the International Monetary Fund, and the author of The Dollar Trap: How the U.S. Tightened Its Grip on Global Finance.

As to just what the Bank of China has done, we'll confess our grasp of the technicalities is tenuous, and you will want to read one or more of the articles listed below.  Our impression is that they have done two things.  On this date, August 11, the PBOC dropped the reference point for the link between the yuan and the dollar by 1.9 percent from the previous day.  That's the devaluation part.  At the same time, the PBOC said that, going forward, each day's opening reference point will be the closing rate from the previous day.  That is the more market determined part.  The significance of the daily reference point is that that it anchors the yuan-dollar relationship for that day.  As one BBC article explains:

"The People's Bank of China manages the rate through the official midpoint from which trade can rise or fall 2 percent on any given day."

Why has China taken this step?  Doubtless there are a range of reasons but concern about the plight of China's exporters has to have been one of them.  With the yuan pegged to a rising dollar, China's currency was soaring against those of her major trading partners, the euro and the yen in particular, and China's exports were falling.  July's 8.3 percent drop in exports, for example,  had to have been on the minds of Beijing's decision makers.

And What About the IMF?  Also on their minds, of course, is China's request to have the IMF include the RMB in the basket of currencies that make up and define the IMF's reserve asset, the special drawing rights or SDRs.  As noted in an earlier entry, the IMF reviews the so-called SDR basket ever five years, and 2015 is a review year.  The big question is, will the IMF Executive Board decide to include the yuan or RMB in the SDR basket?  China very much wants them to, wants the Fund to put the RMB in with the basket's current four: the dollar, the euro, the pound sterling, and the yen.   But will they?

Before today's action by Beijing, the following speculation - which is just that, speculation - nevertheless seemed reasonable:

Is that still a reasonable scenario?

We think it is, but today's events are, at the very least, a complication.  In a note to The Wall Street Journal, HSBC currency strategists said, "Today's change in the USD-CNY [dollar-yuan] fixing mechanism will not impede internationalization efforts."  Admittedly, that is not quite the same as the SDR question, but it is relevant to it.

Both of those issues were front and center at the GBD July 24 event on "Finance and China's Soft Power."   Kevin Quinn of HSBC was one of the speakers at that event.  He said then that "Since 2010, RMB trade settlement has risen from near zero to 22 percent of China's total trade, and we expect it to top over 50 percent by 2050."  Further, he said:

"The RMB increasingly represents a viable alternative to the U.S. dollar.  It's not likely that it will pass the U.S. dollar as a global currency, but markets have accepted it as an alternative.  And they are using it to diversify both for stability and yield."

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On the other hand, for those who have long believed that the RMB is seriously undervalued, Beijing's new policy is an added affront.  Senator Charles Schumer (D - NY) is a strong advocate of that position.  Today he said that " Allowing the renminbi to be declared a reserve currency is akin to putting the fox in charge of the henhouse." The renminbi, he said, "should be barred from consideration as a global reserve currency by the IMF."  

Congress is almost certain to have more to say on this issue.  So too might President Xi of China when he arrives in Washington next month.  In the meantime, the U.S. Treasury Department may weigh in, but as the Financial Times observed in its report on these developments, Treasury's response to them "is likely to be more calibrated that Mr. Schumer's."

China Moves to Devalue is The Wall Street Journal story on this development that includes today's featured quote.

Devaluation and Yuan Globalization is a Wall Street Journal Blog on this topic with a series of useful perspectives.

Lundsager at GBD is the TTALK Quote of August 4, which highlighted Meg Lundsager's comments on the yuan and the IMF at GBD's July 24 event.

Mackintosh at GBD is the TTALK Quote of July 28, which focused on Stuart Mackintosh's remarks at GBD's July 24 event.

Three Year Low is the BBC story on this new RMB development quote in the Context Section above.

Finance and China's Soft Power takes you to the mp3 recording of this GBD program on July 24.

IMF Work Progresses is a link to an IMF article of August 4 that describes the work being done in preparation for the Funds five-year review of the SDR basket, including the question of whether that basket should include China's RMB.

Senate Lashes Out takes you to the Financial Times story with the above quote from Senator Schumer.