Research Briefing | Oct 16, 2023

What’s driving the renminbi in China?

The People’s Bank of China has leaned against persistent renminbi weakness by consistently fixing the currency on the stronger side in recent months. Amid this heavy currency intervention, however, we don’t think there’s a line-in-the-sand dollar/renminbi level that the PBOC is fundamentally preoccupied with. Rather, the central bank is concerned with ensuring that depreciation expectations remain anchored.

What you will learn:

  • Recent historical data suggests that domestic fundamentals are the primary drivers of renminbi movements, with external factors such as rate differentials mattering to a smaller extent.
  • In the near-term, the longevity of a dollar rally, latent credit stresses within the Chinese economy, and further rate cuts likely in the pipeline will keep the renminbi hovering near historical highs going into 2024.
  • Evidence about the role of geopolitical tensions in driving near-term movements in China’s currency is more ambiguous, though one caveat is that the current political backdrop is far more complicated than direct comparisons with historical escalation events would imply.
  • Historically, our analysis shows that depreciation pressures are heaviest in episodes of economic and trade-related tensions, which also invites the strongest currency response from the PBOC.
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