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Trade and Portfolio Flows Driving Currency Weakness, Not PBOC

China’s currency depreciated sharply over the past week in response to highly adverse macroeconomic developments, rising portfolio outflows, and changing trade flows. The PBOC then reacted to the speed of depreciation on Monday night by cutting the reserve requirement for foreign exchange deposits. The depreciation trend should continue in fits and starts in the months ahead, with the PBOC permitting rather than deliberately encouraging further RMB weakness. Changes in the balance of payments are driving these moves, rather than a policy-led effort to improve export competitiveness.

Posted April 27, 2022
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