Skip to main content

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions

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.

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.

https://prosyn.org/QJaZUBk;
  1. bildt70_SAUL LOEBAFP via Getty Images_trumpukrainezelensky Saul Loeb/AFP via Getty Images

    Impeachment and the Wider World

    Carl Bildt

    As with the proceedings against former US Presidents Richard Nixon and Bill Clinton, the impeachment inquiry into Donald Trump is ultimately a domestic political issue that will be decided in the US Congress. But, unlike those earlier cases, the Ukraine scandal threatens to jam up the entire machinery of US foreign policy.

    0
  2. krueger21_trumpamericamediocre

    Making America Mediocre

    Anne O. Krueger

    America owes its economic strength to its private sector, which has long benefited from an absence of undue influence by politicians and the state. But under US President Donald Trump's administration, discretionary decisions by policymakers are increasingly giving some companies advantages over others.

    0