The Indonesian island of Bali hosted both IMF and World Bank leaders on Saturday. Yi Gang, China’s central bank governor, staved off a possible rout in the yuan by gracefully articulating that Beijing is permitting the market to determine the yuan’s value, a key determinant in US criticism of China’s monetary and political regime.

International authorities have pegged a limit to the yuan’s value at seven, meaning any movement beyond this benchmark would indicate significant depreciation warranting an intervention that would trap China into being labeled a currency manipulator.

Gang insisted that the Chinese political, monetary authorities acknowledged the primacy of market dynamics during a tense, protracted trade war with the United States

So far, Yi Gang has managed to prevent a dominant rival from damaging Chinese prospects of managing its mercantilist image. Saturday’s press conference had Gang stating that the international benchmark of seven remains an ideal value representing “a reasonable and equilibrium level” of value.

Gang insisted that the Chinese political, monetary authorities acknowledged the primacy of market dynamics during a tense, protracted trade war with the United States, stating that the “yuan’s volatility is normal.”

Noting the value of the yuan against the backdrop of an appreciating US dollar was significant, if only to highlight the different challenges the US and China have regarding monetary-fiscal policy.  The US continues to thwart an appreciating currency amid profound fiscal deficits, while China seeks to normalize institutional restraint in the management of its currency.

The tariff war between China and the US has heightened the recent sell-off of global equities with the Dow Jones losing nearly 3%, accompanying losses of 4% by the NASDAQ.  The failure of equities immediately before the US midterm elections has spooked the White House, effectively challenging the social direction of team Trump’s dynamic economic turnaround

Gang revealed that US policy developments are responsible for the current rout: “A strong dollar with interest rates hikes by the US Federal Reserve have made conditions tight with capital outflows from developed countries.

With the yuan falling nearly 9% against the dollar over six months, governor Gang acknowledged that China’s preferred policy is grounded in an orderly fluctuation.

Governor Gang took over China’s Central Bank in March of this year.  He has presided over a policy of expanding monetary credit by reducing reserve ratios for Chinese banks, effectively releasing liquidity into China’s domestic economy.

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