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The Renminbi’s Bid for Freedom

The recent decision by the People’s Bank of China to let the renminbi fall below CN¥7 per US dollar has little to do with trade or currency wars. Rather, it represents an important step by the PBOC toward reforming China’s inflexible exchange-rate regime.

BEIJING – In early August, the renminbi’s exchange rate broke through the psychological threshold of CN¥7 per US dollar. While investors were still digesting the full significance of this event, US President Donald Trump’s administration startled the market by labeling China a “currency manipulator.”

The designation is absurd, to say the least, because China doesn’t meet the US government’s own criteria for being a currency manipulator. In fact, the decision by the People’s Bank of China to let the renminbi fall below CN¥7 per dollar had little to do with trade or currency wars. Rather, it represented an important step by the PBOC toward reforming China’s inflexible exchange-rate regime.

True, the PBOC did intervene for a long time in the foreign-exchange market. During the 1998 Asian financial crisis, for example, it adopted a de facto peg of the renminbi to the US dollar, which was a key factor in restoring stability to the region’s financial markets.

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