Blog Post

China and the renminbi matures

In economic terms, China is becoming more of an adult, and the renminbi is becoming a grown-up currency. Russia's actions in Ukraine have prompted the idea that it should be kicked out of the Group of Eight. Maybe that place should be offered to China instead.

By: Date: March 19, 2014 Topic: Global Economics & Governance

Originally published in Bloomberg View on 18/4/14. Reprinted with permission. The opinions expressed are those of the author.

China’s central bank has announced a widening of the trading band of the renminbi from a daily maximum of 1 percent to 2 percent. The move follows a recent increase in the currency’s volatility, and the apparent end of its long, slow rise against the dollar. What does the new policy mean?

Some will say, not much. The People’s Bank of China, on one view, is merely responding to market forces. The sudden downward pressure on the currency merely reflects a new reality, in which China faces economic challenges and its growth slows as a result. Perhaps officials welcome the depreciation because it will help to stimulate the economy. In any event, it’s an essentially passive response to events they can’t control.

There’s more to it than that. Chinese policy makers have been telling the markets for some time that they’re going to let the renminbi fluctuate more freely. They’ve also been more forthcoming about their assessment of the currency in relation to its fair or equilibrium value. These statements suggest that the move to a wider band is part of a longer-term vision — a reading that’s consistent with other recent policy developments, including efforts to reform the domestic interest rate markets.

I’d put it this way: In economic terms, China is becoming more of an adult, and the renminbi is becoming a grown-up currency.

As a more normal major currency, the renminbi will go up and down, and its movements, especially on a daily basis, will become less predictable. There’ll be dramas now and then. The currency is still in transition, and experience suggests that the markets may test how far the central bank is in control by pushing the renminbi toward its new lower bounds. Sure, that could happen — but it’s the direction of the reform that matters.

I’ve noticed I’m often more impressed than the average observer by China’s policy making. This is no exception. The timing of this move is astute. The economic fundamentals driving exchange rates make it increasingly clear that the renminbi is no longer undervalued. Indeed, the latest monthly trade figures reported a large deficit. The Chinese New Year probably distorted those numbers, but the longer-term trend points the same way.

In 2013, China’s current-account surplus fell to less than 3 percent of gross domestic product; before the global credit crisis of 2008, the surplus was running at more than 10 percent of GDP. This year, the surplus will probably fall again, to less than 2 percent of GDP. Whatever else happens, politicians in the U.S. and elsewhere can no longer accuse China of keeping its currency unfairly cheap.

Many observers have noticed China’s weaker export performance — one cause of the smaller surplus. But the rise in Chinese imports gets less attention. In a new paper for Bruegel, a European think tank, Alessio Terzi and I discuss world trade (which is changing rapidly) and global governance (which isn’t). The paper emphasizes that China’s role as an importer is on the rise. Already, its share of global imports, at roughly 10 percent, is not far short of the U.S. share. The latest data strengthen my belief that by the end of 2015, China may well be the world’s biggest importer of goods and services.

China has successfully moved toward more balanced trade while managing its currency more closely than many would have liked. That ought to command some respect — and the same goes, if you ask me, for the thinking of the Chinese leadership on the pace of reform in domestic finance, and on whether and when the renminbi should be granted a bigger role in global finance. We’ll probably hear more from China on that second issue soon. I think it’s time for the International Monetary Fund to consider including the renminbi as part of the Special Drawing Rights basket. (An updated assessment of the SDR’s role is due by the end of 2015.)

Why not go further? Russia’s actions in Ukraine have prompted the idea that it should be kicked out of the Group of Eight. Maybe that place should be offered to China instead.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Upcoming Event

Jun
19
12:30

What reforms for Europe's Monetary Union: a view from Spain

How is a successful European Monetary Union still possible in today's ever-shifting political landscape? What reforms need to occur in order to guarantee success of cohesive policies?

Speakers: Fernando Fernández, José Carlos García de Quevedo, Gabriele Giudice, Inês Goncalves Raposo, Javier Méndez Llera and Isabel Riaño Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jun
20
12:30

Sound at last? Assessing a decade of financial regulation

What has changed since the financial crisis of 2008 that makes the financial system sound at last? Is regulatory reform going in the right direction? Has it run its course? 

Speakers: Patrick Bolton, Rebecca Christie, Maria Demertzis, Mathias Dewatripont and Xavier Vives Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jun
24
08:30

China’s investment in Africa: consequences for Europe

How is Chinese investment impacting Africa, and what could be the consequences for Europe?

Speakers: Solange Chatelard, Maria Demertzis, Alicia García-Herrero and Abraham Liu Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Working Paper

China and the world trade organisation: towards a better fit

China’s participation in the WTO has been anything but smooth, as its self-proclaimed socialist market economy system has alienated its trading partners. The WTO needs to translate some of its implicit legal understanding into explicit treaty language, in order to retain its principles while accommodating China.

By: Petros C. Mavroidis and André Sapir Topic: Global Economics & Governance Date: June 13, 2019
Read article Download PDF More on this topic

External Publication

Effectiveness of cohesion policy: learning from the project characteristics that produce the best results

This study by Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza, and Catarina Midões analyses the characteristics of cohesion policy projects that can contribute to successful outcomes. Their analysis is based on a literature survey, an econometric analysis and interviews with stakeholders. About two dozen project characteristics are considered, and their association with economic growth is studied using a novel methodology. Based on the findings, the study concludes with recommendations for cohesion policy reform.

By: Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: June 11, 2019
Read article More on this topic More by this author

Blog Post

The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 11, 2019
Read about event More on this topic

Upcoming Event

Jul
12
09:30

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Eric Cornuel, Ding Yuan, Jiang Jianqing, Pascal Lamy, Li Mingjun, Signe Ratso, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff and Xu Bin Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Too crowded bets on “7” for USDCNY could be dangerous

The Chinese yuan has been under pressure in recent days due to the slowing economy and, more importantly, the escalating trade war with the US. While the Peoples Bank of China has never said it will safeguard the dollar-yuan exchange rate against any particular level, many analysts have treated '7' as a magic number and heated debates have begun over whether the number is unbreakable.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: June 6, 2019
Read article More on this topic

Blog Post

A European atlas of economic success and failure

Economic growth was diverse across EU regions, yet it is crucial to control for region-specific factors in assessing growth performance. We find that there are rather successful regions in many EU countries, suggesting that the EU can provide a good framework for growth. Yet the worst performers are more concentrated in some countries, suggesting that country-specific factors can play a major role in regional development.

By: Zsolt Darvas, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: June 3, 2019
Read article More on this topic More by this author

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 3, 2019
Read article More on this topic More by this author

Opinion

Expect a U-shape for China’s current account

As the US aims to reduce it's bilateral trade deficit, China's current-account surplus is back in the headlines. However, in reality China’s current-account surplus has significantly dropped since the 2007-08 global financial crisis. In this opinion piece, Alicia García-Herrero discusses whether we should expect a structural deficit or a renewed surplus for China's current-account.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 28, 2019
Read article Download PDF More on this topic

Policy Contribution

How to improve European Union cohesion policy for the next decade

This policy contribution investigates the performance of the design, implementation and effectiveness of cohesion policy, the most evaluated EU tool for promoting economic convergence. By analysing the effects of cohesion policy on economic growth through reviewing literature, conducting empirical research by comparing regions, as well as considering attitudes and expectations collected through interviewing stakeholders, the authors provide reform recommendations.

By: Zsolt Darvas, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: May 23, 2019
Load more posts