Ajay Shah: Mother of all currency defences

The defence of the renminbi reveals the flaws of the much-admired 'China model'

Ajay Shah

The currency defence that everyone remembers is that of the pound sterling in 1992. The UK had a managed exchange rate as part of the European Monetary System, or EMS. The market understood that the exchange rate set by the EMS was wrong, and that a big pound devaluation was required. Capital started flying out of the UK as everyone wanted to avoid the 10 per cent loss from a 10 per cent depreciation. The government tried to raise rates by 500 basis points in order to defend the pound. This lasted three days. The UK economy was quite weak, and it made no political sense to hike rates like ...