RCIF | Research Center for International Finance
Policy discussion No. 2016.001
Jan.28 2016
A Floor for the Renminbi
YU Yongding
The People’s Bank of China (PBOC) faces a dilemma. After nearly a decade of trying to curb expectations of continued currency appreciation (spurred by China’s current- and capital-account surpluses), it finally succeeded in the first quarter of 2014, when its forceful market intervention drove down the renminbi’s exchange rate to discourage carry trades. Now, however, the PBOC is facing an even more difficult challenge, as seemingly irreversible depreciation expectations undermine economic stability at a moment when China can least afford additional uncertainty.
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Nonetheless, given the size of China’s foreign-exchange reserves, markets remained confident that the PBOC could fix the renminbi exchange rate at whatever level it wanted, regardless of China’s external balance-of-payments position. As a result, depreciation expectations were not strong.
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Recognizing the challenge at hand, the PBOC has been allowing the renminbi to fall, slowly but surely, since November. But while this “stealth devaluation” worked for a while, market participants decided at the beginning of this year to dump their renminbi again.
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