China’s recent hands-off approach to renminbi fluctuation could change
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Foreign Exchange

China’s recent hands-off approach to renminbi fluctuation could change

Chinese policymakers may have become more relaxed about fluctuations in the yuan, but no one should doubt their willingness to intervene if the currency moves too far in either direction.


In September, the Chinese yuan started rising. In October, Pan Gongsheng, the deputy governor of the People’s Bank of China (PBoC) and administrator of the State Administration of Foreign Exchange (Safe), stated that the renminbi exchange rate would remain stable. Safe’s deputy administrator, Wang Chunying, described China’s foreign exchange transactions as rational and orderly, adding that persistent appreciation or depreciation was unlikely.

In a research note published in mid-November, HSBC’s global head of FX research referred to optimism that China’s regulatory crackdown was taking a breather as one of the reasons why the RMB might stay strong in the near term.

Yet just days later, it was reported that the China Foreign Exchange Committee had told commercial banks they faced investigation if their proprietary trading volumes increased by a certain amount in total or relative to what they executed on behalf of clients.

Geoff Yu, BNY Mellon Markets.jpg
Geoff Yu, BNY Mellon Markets

And with global markets sent into turmoil at the time of writing after Russia invaded Ukraine on Thursday, it remains to be seen how Chinese authorities will respond to fresh volatility.

According to Jacqueline Rong, deputy chief China economist at BNP Paribas, the largely hands-off approach so far is a result of market participants becoming more accustomed to two-way volatility in the yuan, as well as the fact that strong capital inflows and outsized foreign assets held by Chinese entities offer buffers to any reversal in capital flows triggered by either narrowing US-China interest rate differentials or global risk-offs.


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