Chinese volatility revisited
Renminbi swings much smaller than for dollar D-mark
by Ben Robinson
Mon 25 Jan 2016
Global markets are fixated on the volatility of China’s exchange rate and concerns about renminbi depreciation. Large gaps between the onshore and offshore renminbi rate highlight the extent of China’s currency management, undermining the claim that the renminbi is ‘freely usable’. Beijing’s attempt to maintain the onshore value casts some doubt on whether China will maintain its commitment to capital account liberalisation. Slowing Chinese growth increases the likelihood that China may further loosen monetary policy and promote devaluation to boost domestic activity.
These factors are adding to pessimistic January financial market sentiment, but they need to be kept in perspective. The renminbi is almost exactly where it was against the dollar in January 2011, at around 6.57 (see Chart 1). After strengthening between early 2011 and January 2014 to a high of 6.05, it has since declined back to the starting rate. However, with the dollar strengthening during this same period, China’s currency actually appreciated by almost 29% in nominal terms against its trade partners between 2010 and the third quarter of 2015.
Similar patterns are in evidence regarding the renminbi and the special drawing right, the IMF basket of currencies to which the renminbi will adhere from 1 October. Against the SDR, China’s currency has depreciated (again, largely because of the dollar’s strength) to roughly where it was in the fourth quarter of 2014, but this follows almost four years of near-continuous appreciation.
Foreign exchange markets should put Chinese currency movements into a wider context. During China’s most volatile recent period between December 2015 and January, the biggest daily movement against the dollar was around 0.61%. In contrast, in the period of greatest turbulence during the rapidly fluctuating market of late 1981, the D-mark’s biggest daily movement against the dollar was around 2.35% (Chart 2).
Sterling has moved more sharply than the renminbi over the past month. Between 21 December last year and 21 January the pound fell around 4.5% against the dollar, while the renminbi fell 1.5%. In this context, a further depreciation of the renminbi would both bring it in line with other major currencies and increase the government’s claim to capital account liberalisation.
Ben Robinson is Economist at OMFIF.
Chart 1: Renmimbi exchange rate
Chart 2: Daily RMB, D-mark exchange rate movements against $
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