Renminbi bank notes Si Wei/Xinhua via ZUMA Wire

A Floor for the Renminbi

In early 2014, after nearly a decade of trying to curb expectations of continued currency appreciation, the People's Bank of China finally succeeded, thanks to forceful market intervention. Unfortunately, the PBOC was pushing on an open door and is now facing an even more difficult challenge: strong depreciation expectations.

BEIJING – 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.

Because the 2014 intervention coincided with the weakening of China’s economic fundamentals, it ultimately amounted to pushing on an opening door. Instead of providing credible resistance to upward pressure on the exchange rate, as intended, it triggered an outright reversal, with depreciation expectations beginning to creep into foreign-exchange markets.

Thus, in the second quarter of 2014, China recorded a capital-account deficit for the first time in decades. And by the first quarter of 2015, that deficit more than offset the current-account surplus, meaning that China registered its first international balance-of-payments deficit in recent memory.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/QJaZUBk;
  1. Sean Gallup/Getty Images

    Angela Merkel’s Endgame?

    The collapse of coalition negotiations has left German Chancellor Angela Merkel facing a stark choice between forming a minority government or calling for a new election. But would a minority government necessarily be as bad as Germans have traditionally thought?

  2. Trump Trade speech Bill Pugliano/Getty Images .

    Preparing for the Trump Trade Wars

    In the first 11 months of his presidency, Donald Trump has failed to back up his words – or tweets – with action on a variety of fronts. But the rest of the world's governments, and particularly those in Asia and Europe, would be mistaken to assume that he won't follow through on his promised "America First" trade agenda.

  3. A GrabBike rider uses his mobile phone Bay Ismoyo/Getty Images

    The Platform Economy

    While developed countries in Europe, North America, and Asia are rapidly aging, emerging economies are predominantly youthful. Nigerian, Indonesian, and Vietnamese young people will shape global work trends at an increasingly rapid pace, bringing to bear their experience in dynamic informal markets on a tech-enabled gig economy.

  4. Trump Mario Tama/Getty Images

    Profiles in Discouragement

    One day, the United States will turn the page on Donald Trump. But, as Americans prepare to observe their Thanksgiving holiday, they should reflect that their country's culture and global standing will never recover fully from the wounds that his presidency is inflicting on them.

  5. Mugabe kisses Grace JEKESAI NJIKIZANA/AFP/Getty Images

    How Women Shape Coups

    In Zimbabwe, as in all coups, much behind-the-scenes plotting continues to take place in the aftermath of the military's overthrow of President Robert Mugabe. But who the eventual winners and losers are may depend, among other things, on the gender of the plotters.

  6. Oil barrels Ahmad Al-Rubaye/Getty Images

    The Abnormality of Oil

    At the 2017 Abu Dhabi Petroleum Exhibition and Conference, the consensus among industry executives was that oil prices will still be around $60 per barrel in November 2018. But there is evidence to suggest that the uptick in global growth and developments in Saudi Arabia will push the price as high as $80 in the meantime.

  7. Israeli soldier Menahem Kahana/Getty Images

    The Saudi Prince’s Dangerous War Games

    Saudi Arabia’s Crown Prince Mohammed bin Salman is working hard to consolidate power and establish his country as the Middle East’s only hegemon. But his efforts – which include an attempt to trigger a war between Israel and Hezbollah in Lebanon – increasingly look like the work of an immature gambler.