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Opinion | China should keep focusing on growth and not worry about a weak yuan
- The yuan has weakened significantly against the dollar multiple times since 2015, with the People’s Bank of China fighting to defend its value for fear of a collapse
- But despite a sharp depreciation again this year, policymakers have held back, suggesting a stronger confidence in the Chinese economy
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The renminbi’s value used to feature heavily in debates about global imbalances. While outsiders considered it to be undervalued and urged appreciation, the People’s Bank of China (PBOC) insisted on maintaining the currency’s de facto peg to the US dollar. In recent years, however, China’s concerns that its currency would grow too strong have been replaced by fears of a sharp depreciation.
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Though China has sustained its current-account surplus, capital outflows have been putting the exchange rate under frequent downward pressure since 2015. The sources of the pressure can be divided into three broad categories: deteriorating domestic economic conditions, non-economic factors and arbitrage.
In 2015, while equity prices crashed and led to months of market turbulence, and GDP growth was losing momentum, the PBOC introduced a new rule for setting the renminbi central parity rate against the US dollar to make the renminbi exchange rate more flexible.
Though the move itself was correct, it triggered a sudden rise in expectations of renminbi depreciation. With that, capital began flowing out of China – and continued to do so through to the end of 2016. To shore up the renminbi, the PBOC burned through some US$1 trillion in foreign exchange reserves during this period.
In 2018, non-economic factors – specifically, rising tensions with the United States – became the main driver of capital outflows. From March 2018 to May 2022, the renminbi exchange rate fluctuated significantly, reflecting the shifting intensity of Sino-American tensions. For much of this period, the exchange rate hovered below the psychologically important threshold of 7 yuan per dollar.
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The recent build-up of renminbi depreciation pressure began in May 2022, with the currency depreciating against the dollar at an unprecedented rate, again breaking the 7 yuan threshold in September.
This time, the main factor has been arbitrage activities, with investors seeking to take advantage of the widening interest rate differential between China and the US.
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