Why renminbi falters, but doesn't fall

The Chinese renminbi is sliding as a result of the escalating trade war. However, the Chinese government has already learned an expensive lesson and will not just drop the coin.

The trade war between the United States (US) and China has been making itself felt in foreign exchange markets more and more recently. the renminbi has fallen by more than 4% against the dollar since mid-June. That is a significant move for a currency whose exchange rate is controlled by the local government.

This control also ensures that the renminbi has not fallen faster. This happened, for example, with the stock market, on which the government has a much less firm grip. Share prices on the Shanghai stock exchange have already fallen by 16%.

Good balance
It is now important that the Chinese government finds a good balance in guiding the slide of the renminbi. If the currency falls too quickly, a repeat of the August 2015 panic is looming. At the time, the central bank lowered the currency by about 2% within 4 days. That unexpected move spotlighted the large capital outflows, which threatened to disrupt the country's economy. The worries then spread to Western stock markets, which sometimes fell by 5% or more.

It seems that China does not want to make that mistake again. Yi Gang, the chairman of China's central bank, pledged on July 3 to keep the exchange rate "stable at a reasonable and balanced level". After this message, the currency bounced by almost 1%. On the other hand, a rising renminbi is not entirely in the country's best interest. In view of the trade barriers that the US President Donald Trump raises, a somewhat cheaper currency would be nice to give exports a boost.

Think ahead
The economic measures that China has taken in recent years indicate that the country is thinking at least 5 years ahead. Defending the interests at that time is much more important than a moral victory in the trade war† Although China obviously wants to avoid losing face, it can afford not to choose a confrontation very sharply. The economy is increasingly driven by domestic consumption rather than the export sector.

The most likely scenario is that China will allow the renminbi to fall further slowly and gradually. This gives the export sector a little more air, while Trump does not get new ammunition for taking new trade measures. The renminbi has been faltering in recent weeks, but the Chinese government will not let the currency fall.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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