Renminbi series: China has its own version of impossible trinity

The impossible trinity a theory in International Economics, which states that a country can execute only two of the following and it is impossible to sustain all three -

• A stable exchange rate
• Free capital movement
• Independent monetary policies

However, China seems to having its own version. As time goes by it is shifting its stance between the three and probably trying to partially control all of them or at least guide them.

Recent Chinese actions suggest, in its bid to make Renminbi Internationally accepted, it has been reducing its grip over capital control, slowly but more are likely to come in 2016. But in a time of heavy turmoil and outflow, Chinese authorities jump back with additional controls and crackdowns. For example in order to control depreciation of offshore Yuan PBoC introduced draining of liquidity.

It also infuses cash into the financial system to keep interest rates on check. Recent price action in Yuan suggests PBoC might be keeping it under control.

As this impossible trinity holds, it is only matter of time PBoC would have to give up controls but with its $3.33 trillion it might keep it under control for some time.

However, despite speaking of reforms, PBoC' attempt to control the trinity is creating more confusion, what PBoC's actual monetary policy regime is and what's the future outlook.