Michael Pettis — Do markets determine the value of the RMB?

Last Tuesday the PBoC surprised the markets with a partial deregulation of the currency regime, prompting a great deal of discussion and debate about the value of the RMB. Part of the discussion was informed by a consensus developing in one part of the market that the RMB is no longer undervalued but is in fact overvalued. Why? Because if left to the “market”, that is if the PBoC stopped intervening, the excess of dollar supply over demand would force the RMB to fall.

This argument is based on a pretty confused understanding of how markets work and why investors do what they do. I thought it might be useful if I were to try to lay out the issue a little more clearly, and along the way address related issues. Because it isn’t necessarily easy to tie all of the topics together in an essay, I thought it might be better if I put it in the form of a series of questions.

China Financial Markets
Do markets determine the value of the RMB?
Michael Pettis | Professor of Finance at Peking University’s Guanghua School of Management