By Vaibhav Tandon

The Japanese style of management has given the world principles like just-in-time inventories and kaizen (continuous improvement).  But not a lot is documented about Chinese management practices.  China’s industry-driven management approach is characterized by a top-down style with a strong emphasis on authority.  The country takes a similar approach to managing its exchange rate system. 

The Chinese yuan (CNY) is not free-floating like the U.S. dollar (USD) and other major currencies; it is actively managed by China’s monetary authority.  While most currencies have gained against the dollar this year amid high volatility, the CNY has remained stable.  The U.S. effective tariff rate on Chinese goods surged to slightly above 30% in a matter of weeks, and interest rate differentials with the U.S. remain wide.  Yet, the USD/CNY fixing has been lower than its level before President Trump’s inauguration. 

This is a sign that Chinese policymakers are unlikely to weaken the CNY to counter the impact of U.S. tariffs.  By allowing the currency to depreciate, Beijing would risk being relabeled a currency manipulator by the U.S., leading to further trade hostilities.  China has allowed the CNY to depreciate by only about 15% against the U.S. dollar over the past two decades, an agonizingly slow pace.

While some managed depreciation of the CNY may be in store, letting the currency weaken would do more harm than good to the economy.  A sharp depreciation would partially offset the impact of tariffs, but would also dent sentiment and trigger capital outflows.

The People’s Bank of China (PBoC) is keeping options in reserve as it awaits more clarity on trade ties with the United States.  The central bank has pledged to balance easing moves with currency stability to prevent short positions from arising.  But the focus on maintaining a stable exchange rate is an added constraint to monetary easing. 

Japanese factory workers are empowered to intervene in production processes if they observe a problem.  Chinese policymakers will almost certainly have to continue intervening in currency markets as trade problems with the United States escalate.  Holding the line on the CNY will be no easy task.