Officials at the People’s Bank of China have long insisted that “China won’t weaponise the renminbi.” And yet, implicit in their promise not to manipulate the currency for strategic ends is their ability to do so if they so desired. China’s monetary policy has come to the fore so much so that the US President, Donald Trump, has imposed import tariffs on a range of Chinese goods. Many are wondering if China will respond to Trump’s trade war by threatening a currency war. If it does, the world should call its bluff.
A report in the the japan times stated that with more than $3 trillion in foreign reserves and an established — albeit not entirely successful — system to manage its exchange rate, China has enough financial and monetary leverage to bring the US economy to its knees. But though it has the financial muscle, but that does not mean that China can afford to use them.
The report further stated that in June, the renminbi had its worst month on record, dropping 3.7 per cent against the dollar. Analysts are divided about the cause. Some view it as the result of a slowdown in economic growth, coupled with market concerns about the introduction of US tariffs and dollar appreciation on the back of rising US interest rates. Others suspect that Chinese monetary authorities intervened to weaken the renminbi, in order to offset the impact of US policies.
The Chinese Government has a long history of intervening to ensure that the renminbi’s exchange rate aligns with its economic goals. But, since 2016, when the renminbi was included in the basket of currencies that determines the value of the International Monetary Fund’s (IMF) Special Drawing Rights (SDR), market forces has especially determined the exchange rates.
China’s monetary authorities are already struggling to maintain financial stability under conditions of slowing economic growth, a total debt-to-GDP ratio of around 250 per cent, and monetary-policy normalisation on the part of the US Federal Reserve.
China thus finds itself between a rock and a hard place. To discourage new lending and reduce the risk of capital outflows, the People’s Bank of China should tighten monetary policy. But counteracting the negative impact on growth resulting from rising US interest rates and tariffs calls for more monetary accommodation.