What next for the renminbi with Trump in the White House?

G. Bin Zhao says far from being a currency manipulator, China has made significant efforts to reform its exchange rate regime, and it now has an opportunity to target a free float this year

Reading Time:3 minutes

With the US dollar index close to historic highs, China has a great opportunity to radically reform its exchange rate mechanism and pave the way for greater internationalisation of the renminbi. Photo: Reuters

Published: 1:23pm, 10 Feb 2017Updated: 7:14pm, 10 Feb 2017

During his US presidential campaign, Donald Trump accused China of intentionally manipulating its currency by deliberately depreciating the renminbi to gain a competitive advantage for Chinese exports.

However, this is a far cry from reality. China has significantly changed its exchange rate formation mechanism over the past decade – shifting from a “hard peg” to the US dollar to a “managed float regime.” Currently, the renminbi’s exchange rate is based on a basket of currencies, not just the US dollar. According to the IMF’s definition, this “crawl-like arrangement” is one type of “soft peg”.

Reforms related to liberalising China’s exchange rate regime have been widely recognised, especially by the International Monetary Fund. In September, to mark the launch of the new special drawing rights (SDR) basket including the renminbi, IMF managing director Christine Lagarde said: “The renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalising and improving the infrastructure of its financial markets.”

China’s renminbi joins the SDR – a basic guide

The market believes the renminbi is currently overvalued against the US dollar and most investors expect it to further depreciate by at least a few percentage points against the greenback this year.

Contrary to Trump’s accusations, the renminbi has actually appreciated sharply against the dollar over the past decade. Since the dollar started rising from mid-2015, China has made painstaking efforts to slow down the renminbi’s depreciation against the US currency, and its central bank is believed to have spent about US$800 billion from its foreign currency reserves.

Earlier this year, former US Federal Reserve chair Ben Bernanke said calling China a currency manipulator doesn’t “fit with reality”, and acknowledged that: “China right now is working very hard to keep the renminbi from falling.”

Former Federal Reserve chairmen Ben Bernanke (centre) and Paul Volcker, with current head Janet Yellen, in New York last April 7. Bernanke, who led the Federal Reserve from 2006 to 2014, said in January that calling China a currency manipulator does not “fit with reality”. Photo: AP

What next for the renminbi with Trump in the White House?

G. Bin Zhao says far from being a currency manipulator, China has made significant efforts to reform its exchange rate regime, and it now has an opportunity to target a free float this year

China’s renminbi joins the SDR – a basic guide

The day the renminbi becomes a truly ‘normal’ currency isn’t so far off now