The Global Economy in Turbulent Times

CHAPTER 75 RMB: What’s a Budding Currency to Do?¹

China’s yuan or RMB (renminbi) is brewing a storm of late. I was visiting Bangkok when news came that on the last Friday of February 2014 the usually predictable RMB took its biggest dive against US dollar since it was depegged in 2005. RMB had depreciated by nearly 1 percent over the past week—reversing a long-running trend of gradual, incremental appreciation against US dollar and other major currencies during the past eight years. The move caught the market by surprise—ending at US$1 = RMB6.1450 on Friday, down 1.5 percent since the beginning of the year. This is its lowest level in 10 months, a dramatic move for a currency that often barely budges and that only gained close on 3 percent for 2013 as a whole.

The slide added jitters among investors already anxious about the slackening Chinese economy and touched off concerns about a possible RMB sell-off in offshore markets. Certainly, it has rekindled uncertainty about the RMB exchange rate. Indeed, has China finally joined the currency war? Many have also expressed concern. Before too much is being read into RMB’s fall, some perspective is in order.

US Dollar in 2013 and to Date

Between 2001 and 2008, the dollar index, which measures US$ against a basket of major currencies, fell more than 40 percent as the United States’ long-standing “strong dollar” policy degenerated into a “hackneyed punchline.” Since the collapse of the Bretton Woods monetary system in 1971, when ...