China’s central bank engineered an abrupt end to the carry trade in the renminbi last month. Could it also be helping to drive up the ever-appreciating euro?
Very likely, is the conclusion of currency strategists. Chinese officials have long been determined to lessen a reliance on the dollar as the world’s dominant reserve currency. But they can only act on this resolve at times when foreign exchange reserves are accumulating – giving reserve managers the opportunity to diversify.
They certainly have the opportunity at the moment. China’s foreign exchange reserves jumped by around $0.5tn to $3.8tn in 2013, following a much smaller increase in 2012. Most of the growth took place towards the end of the year, and probably reflected inflows of hot money as investors bet on a steady rise in the renminbi.