Chart of the Week: Renminbi depreciates sharply

The Chinese renminbi is suffering severe depreciation pressures, mainly due to the divergence in interest rates between China and other advanced economies such as the US and the euro area. While the central banks in those economies started an aggressive hiking cycle last year, monetary policy in China has remained very accommodative. Not even China’s reopening after the end of its draconian zero-COVID policy has managed to lift the renminbi, which has depreciated by 4% since the beginning of the year. Beijing’s intermittently hostile stance towards private corporations, as well as the increasingly authoritarian flavour of Chinese politics, have affected overseas appetite to invest in the Asian giant, resulting in strong capital outflows that have also weighed on the currency. Other factors, such as geopolitical tensions and restrictions on flows of US tech, have also played a role. If the Chinese recovery continues to disappoint in months to come, the People’s Bank of China (PBoC) is likely to maintain its loose monetary policy stance, exacerbating the pressure on the renminbi even though rate hikes in other advanced economies now seem to be tailing off. In this context, the exchange rate is one of the tools that the PBoC may use to lift the economy from its current slump – allowing the CNY to continue to weaken may provide a boost to Chinese exports in a challenging external environment. This would not be a novelty: over the past few years we have seen strong devaluations, mainly triggered by the trade war during the Trump administration.

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The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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