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Questions about the renminbi’s stress

Kam Wei NG
 

The rapid pace of correction of the renminbi exchange rate recently has surprised the market. What have changed to trigger the slide? Is China finally shifting to a devaluation policy? Will it surprise the market again by rebounding later?

Concerns about escalating Sino-US trade tensions have rattled the renminbi, which has given back all its 1H 2018 gains against the USD within just a few weeks recently. Its sharp fall has also raised the suspicion that Beijing might have shifted to a devaluation policy to fight the trade war. I beg to disagree. In addition to other reasons, Beijing will not want to repeat the experience in August 2015 when the PBoC reformed the renminbi fixing mechanism but the market misread it as a devaluation move, causing massive capital outflows and wreaking havoc the renminbi and the global markets. It took Beijing almost two years to stabilise capital flows with capital controls.

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