There has been a significant weakening in China’s exchange rate in recent days. Although the spot rate against the dollar has moved by only about 1.3 per cent, this is actually a large move by the standards of this managed exchange rate. Furthermore, the move is in the opposite direction to the strengthening trend seen in the exchange rate over the past three years.
This has triggered some pain among investors holding long renminbi “carry” trades, along with much debate in the foreign exchange market about what the Chinese authorities are planning to do next. Since China does not explain its internal or external monetary policy in a transparent manner that is intelligible to outsiders, there is much scope for misunderstanding its true intentions. The key question is whether the Chinese authorities are changing their commitment to a strong exchange rate and, if so, why?
The rise in China’s real exchange rate, amounting to more than 40 per cent since 2005, has been one of the forces which has helped the global economy to rebalance in recent years, encouraging a narrowing in the US trade deficit against China, and also allowing other emerging economies to absorb the effects of the devaluation in the Japanese yen without feeling too much pain.