BEIJING – From July 2005 until this past December, China’s renminbi (RMB) appreciated steadily. But then the RMB fell unexpectedly, hitting the bottom of the daily trading band set by the Peoples’ Bank of China (PBoC) for 11 sessions in a row. Though the RMB has since returned to its previous trajectory of slow appreciation, the episode may have signaled a permanent change in the pattern of the exchange rate’s movement.
As long as China was running a trade surplus and receiving net inflows of foreign direct investment, the RMB remained under upward pressure. Short-term capital flows had little impact on the direction of the RMB’s exchange rate.