Michael Pettis: Do Markets Determine The Value Of The RMB?

Do Markets Determine The Value Of The RMB? by Michael Pettis' China Financial Markets

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...