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The Renminbi Has Room to Weaken - But No "Currency War"
The renminbi has been weakening; in recent sessions USDCNY broke 7.30, touching its most depreciated bilateral level in 17 years.
But this is happening in a "boring" way. The current depreciation comes at a time when (i) trade and current account surpluses are huge, and (ii) the renminbi is still at the higher end of its trade-weighted trading range. We look at this as a policy-controlled move, not a sign of wildcat outflows.
Could the government weaken the renminbi further? Sure, it could. Again, the renminbi has been trading strong on a trade-weighted basis in recent years, and the authorities have room to let it depreciate further in response to tariff pressures.
But it's important to stress that China does not want a currency war. There is a clear limit to how much external volatility the authorities can endure (sudden aggressive depreciation, mass sell-off of US treasuries, etc.). The overwhelming policy priority for the government is financial stability at home in the face of enormous excess liquidity - and this is much more important than "warring" with the US.
The Renminbi Has Room to Weaken - But No "Currency War" (PDF)
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