Today’s Wall Street Journal reports, “The People’s Bank of China has taken tentative and indecisive steps to ease monetary policy, but it hasn’t done enough,” David Goldman of Hong Kong-listed broker Reorient Group Ltd. wrote in a research note.

The cited Reorient Group report has two noteworthy charts. The first shows how real interest rates in China (the 3-month repo rate minus YOY change in CPI) tracked the RMB’s real effective exchange rate.


The second chart shows how the rising real effective exchange rate damaged Chinese exports.


Reorient concludes, “Monetary policy isn’t solely to blame for China’s stock market volatility, to be sure, but the PBOC’s errors create real problems and problematic perceptions. Without a clear statement of objectives—which should be to keep real short-term interest rate close to zero and stop the effective appreciation of the exchange rate—the PBOC appears to be flailing in response to events. “Is Governor Zhou Xiaochuan imitating the U.S. Federal Reserve’s expectation that the central bank must rescue asset prices?,” the Wall Street Journal asked July 2. The PBOC doesn’t need to emulate the Greenspan/Bernanke put on stock prices, but it does need to adjust monetary policy to economic reality.”

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