renminbi banknotes counting VCG/Getty Images

Why is the Renminbi Depreciating?

In 2015-2016, the People's Bank of China drained some $1 trillion from China’s foreign-exchange reserves intervening to prop up the falling currency. As the renminbi again begins to depreciate, Chinese policymakers should recall this experience and avoid similarly costly – and futile – interventions.

BEIJING – China’s currency has started falling again. The last major depreciation of the Chinese renminbi began in the second half of 2015, triggered by a surge in capital outflows. Despite repeated interventions by the People’s Bank of China (PBOC), markets remained frenzied for more than a year. The currency’s value fell to nearly CN¥7 per US dollar, before stabilizing in early 2017.

The latest decline has been even sharper. After more than a year of appreciation, the exchange rate began to weaken in the second quarter of 2018 – a drop that accelerated significantly in June, when the currency suffered its largest-ever monthly decline against the US dollar. So far, the renminbi had depreciated by over 8% against the dollar.

Like in 2015-2016, investors are concerned about China’s economic prospects. The country’s GDP growth is slowing, owing to declining infrastructure investment and poor export performance – trends that investors now fear could be reinforced by the tit-for-tat trade war that the United States has initiated. Some have even expressed concern that the falling renminbi could exacerbate that trade war, if it is (wrongly) perceived by the US to be a purposeful devaluation aimed at securing a trade advantage.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

http://prosyn.org/sEppvmT;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.