The U.S. dollar’s relentless rally has brought fresh concerns to Chinese policymakers as disorderly currency movements could derail the economic recovery and fuel capital flight. Nonetheless, the renminbi’s resilience against key trading partners, strong trade flows and the Chinese central bank’s robust FX toolkit should help China withstand the present currency weakness until the dollar peaks.

U.S. dollar vs. Renminbi
December 2021–present

Line graph of U.S. dollar vs. Renminbi, December 2021–October 2022

Bloomberg, Principal Asset Management. Data as of October 13, 2022. Note: Trade-weighted RMB is the CFETS RMB index, the official trade weighted RMB index against a basket of foreign currencies authorized by PBoC.

The hawkish Federal Reserve (Fed) is supercharging the U.S. dollar, pushing it to a 20-year high and curtailing the ability of other global central banks to effectively stabilize their economies.

China is no exception. With the People’s Bank of China (PBoC) trying to keep monetary policy loose, the yield differential between the U.S. and China has turned firmly in favor of the greenback. China’s continued restrictive COVID policy has also significantly hurt confidence, further reducing the relative attractiveness of the renminbi—contributing to a 6% depreciation against the U.S. dollar in just the last three months, and also prompting capital outflows.

While concerning, the situation is not as dire as it may appear. The renminbi has held steady against the currencies of China’s major export rivals, and trade flows have remained strong, partially offsetting capital outflows. Policymakers are also deploying measures aimed at limiting further RMB depreciation. Increasing onshore foreign currency liquidity, and curbing currency speculation via increases to the risk reserve ratio, jointly suggest a disorderly depreciation of the RMB is unlikely. As such, the PBoC should be able to ride out the present currency weakness until the U.S. dollar peaks, potentially when Fed policy rates peak early next year.

Nonetheless, challenges could still emerge next year if shrinking global demand results in slowing export growth, renewing downward pressure on the renminbi. A storm cloud be forming on the horizon.

Macro views

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