From currency peg to currency band: Until 2005, China’s renminbi was pegged at CNY 8.3 per USD. From that moment on the government shifted to a managed float, allowing the currency to move within 2% of a daily rate set by China’s central bank, the PBOC. This change led the renminbi to depreciate by around a quarter over the decade that followed—a consequence of China’s massive trade surplus. Afterwards, from the mid-2010s to 2022, the currency further lost value as investors soured on China’s economy and the PBOC reduced its intervention in the FX market. Over the last two years, however, the currency has been broadly stable, largely as the PBOC has itself set a fairly stable exchange rate in order to limit depreciatory pressures. As a result, the renminbi has recently traded more like a currency that’s de facto pegged in a narrow trading band.
Renminbi internationalization still in the early stages: The Chinese government is making an effort to boost the attractiveness of the renminbi overseas. A decade ago the authorities introduced the cross-border international payment system (CIPS) as an alternative to the U.S.-dominated SWIFT system. Beijing has signed renminbi swap lines with dozens of foreign central banks, and pushed to settle more of its own trade in domestic currency. However, the renminbi still accounts for just 2% of international currency usage, compared to over 50% for the U.S. dollar. Restrictions on the exchange rate—which as mentioned have increased in the last couple of years—plus capital controls and concerns over sudden shifts in policymaking are likely to preclude the CNY from unseating the USD as the world reserve currency any time soon.
Our panelists’ forecasts for the exchange rate: The Consensus of the 50+ panelists we poll is for China’s renminbi to gradually appreciate over the coming years, and to move back below CNY 7.0 per USD by the end of the decade; monetary easing by the Federal Reserve will narrow the interest rate gap between the U.S. and China. However, any moves in the exchange rate are likely to be gradual, given the government’s focus on preserving stability above all else.
Insight from our panelists:
On the short-term outlook for the currency, Goldman Sachs analysts said:
“CNY continues to screen as significantly undervalued, with the degree of undervaluation now comparable again to the period of the China shock in the mid-2000s. While there is always substantial uncertainty around FX fair value metrics, recent economic performance—large export market share gains and a surge in the current account surplus—help corroborate these model estimates.”
On the outlook for renminbi internationalization, EIU analysts said:
“China will promote the use of the renminbi as a reliable international currency, at a time when confidence in the US dollar is eroded by Mr Trump’s policies. The outlook for reniminbi internationalisation is mixed, however. China could commit a greater amount of overseas aid and loans, along with other forms of support (including in supply chains), in exchange for the expansion of the renminbi’s role in global settlement and financing, as well as a reserve currency. Nevertheless, despite the growing percentage of the renminbi in trade settlement, the currency continues to make up less than 2% of global trade invoicing—suggesting limited (albeit growing) uptake in international trade. The renminbi will not emerge as a credible substitute to the US dollar in the medium term.”
Our latest analysis:
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