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Analysis

The fall of the renminbi

by Gabriel Stein

Mon 3 Mar 2014

The renminbi Enlarge Chart loading Image

What the chart shows: The chart shows the daily exchange rate of the renminbi against the US dollar (renminbi/dollar).

Why the chart is important: Until mid-2005, the renminbi was firmly pegged to the US dollar. Since 2005, it has gradually been allowed to fluctuate in a band around the greenback. Currently this band is 1%, with each day’s closing rate being the central rate for the next day. For much of the period since the change, the renminbi was seen as a one-way bet. The currency was perceived to be undervalued and thus likely only to rise over any meaningful period. However, since mid-January – and even more so since mid-February – the renminbi has depreciated sharply. This seems to be due to two factors. First, the Chinese authorities’ attempt to deter speculation in the future of the currency. Second, an attempt to guide the renminbi lower preparatory to widening the trading band further, so that it would start from a lower position. The importance of the latter cause is that it may be a guide to how the Chinese authorities may aim to liberalise the exchange rate, namely by progressively widening the trading band until it becomes meaningless. Of course, at that stage, speculation about the future of the renminbi will be a daily occurrence, whatever the authorities think.

Chart and comments provided by Oxford Economics www.oxfordeconomics.com