Analysts from one of America’s most influential foreign policy think tanks expect Beijing to expand support for the renminbi by selling off its immense stash of greenbacks.
Many outside observers have alleged that China is manipulating the renminbi to bolster the country’s all important export sector – especially under the pall of onerous tariffs from the Trump administration.
Benn Steil and Benjamin Della Rocca from the Council of Foreign Relations say that the People’s Bank of China has in fact been pushing the renminbi higher, however, and is on track to further intensify such efforts in future.
“In spite of President’s Trump’s repeated charges that China is manipulating its currency for competitive advantage in trade, all evidence suggests that it will continue to do the opposite,” they write.
Steil and Della Rocca say that a declining renminbi would only exacerbate the foreign-denominated debt of China’s still heavily leveraged corporate sector, potentially even leading to a balance of payments crisis.
While the copious purchase of Chinese assets by foreign portfolio investors has helped to support the renminbi for the past two years, these inflows are on the verge of reversing following a more than 20% drop in Chinese stocks since their peak in January.
An exodus of liquid foreign capital will put downwards pressure on the renminbi, leaving China’s monetary stewards with few options for shoring it up.
An interest rate hike would put the brakes on an already slowing economy, while insisting upon heftier returns for overseas lending to keep capital within China would undermine the subsidisation of state-driven overseas expansion by Chinese companies, via initiatives such as Belt and Road.
For this reason Steil and Della Rocca expect the Chinese central bank to sell off its dollar reserves to strengthen support for the renminbi, as it did several years ago in 2015 when a stock market rout caused jitters amongst foreign investors.
They warn, however, that another sell off of commensurate intensify could push China’s foreign reserves beneath the safety threshold for adequacy outlined by the IMF by as early as the middle of 2020.