Decoding China’s FX guessing game
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Foreign Exchange

Decoding China’s FX guessing game

Previous changes of policy direction have left analysts undecided on whether to attribute recent sharp corrections to the renminbi reference rate to accident or design – or even a combination of the two.

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Photo: Pixabay

Trying to second-guess China’s policymakers is usually futile, so no one should have been surprised when the People’s Bank of China (PBoC) raised its USD/CNY fixing on March 22 by the largest amount since the start of the year.

The move enabled USD/CNY to trade through 7.20 for the first time since November 2023 and led to speculation that China’s central bank could move towards a managed depreciation regime, where the daily fixing is increased slowly, but at a pace dictated by the upper bound of its 2% trading range.

Simon Harvey, head of FX analysis at Monex Europe, thinks this is unlikely. He says capital outflow pressures, the likely impact on investor and consumer confidence, and yuan depreciation are threatening China’s longer-term economic objectives of rebalancing the economy away from exports to consumption-driven growth and internationalizing the use of the yuan.

While the yuan is seen as expensive on a nominal trade-weighted basis, China’s exports remain highly competitive once adjusted for inflation
Simon Harvey, Monex Europe
Corporate Photographer London

“While the yuan is seen as expensive on a nominal trade-weighted basis, China’s exports remain highly competitive once adjusted for inflation, meaning there is little growth benefit from allowing the yuan to weaken,” he says.

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