
It is rare that a seemingly parochial U.K. government bond rout smothers an important China story, but these are strange times. Had it not been for the recent extraordinary instability in the gilt market, triggered by the British government itself, the fall in China’s renminbi to its lowest level against the dollar since 2008 last week would undoubtedly have dominated the news in global financial markets.
At first glance, the Chinese currency’s slide appears to be more about the dollar’s strength — caused by the Federal Reserve’s series of interest rate rises in recent months — than a renminbi crisis. While the Chinese currency has slid by roughly 14-15 percent against the dollar this year, that’s in line with what has happened to a broad basket of currencies against the dollar tracked by the St Louis Federal Reserve. The renminbi has been relatively stable or even firmer against other major global currencies meanwhile.
And while the dollar has been as strong as an ox this year against all-comers, the Chinese currency’s depreciation past seven renminbi to the dollar — a level it never breached in the decade to 2016 — has become an almost annual feature in recent years. The People’s Bank of China (PBOC) has regularly stepped into markets to thwart such depreciation, and has recently tried to do so again.
But could it be different this time? And what difference might it make?
The renminbi’s fall against the dollar this year does seem to have caused Chinese policymakers unusual levels of anxiety, judging by their efforts to calm markets. In a commentary in the state-owned Securities Times a few days ago, the PBOC warned traders to refrain from making one-way bets against the renminbi, while insisting — perhaps protesting too much — that the currency is not behaving unusually.
The only viable option for the central bank to stem the tide and prop up the Chinese currency is to intervene using its $3 trillion pool of foreign exchange reserves, by selling some of its dollars to buy renminbi.
The PBOC’s concerns about the dollar-renminbi rate look more justified when the importance of the U.S. currency to China’s economy is taken into account. Over three-quarters of Chinese trade is denominated in dollars, as is the vast majority of Chinese banks’ borrowing and lending abroad — for example, to Belt and Road countries. The dollar is also the currency of choice for Chinese residents looking to move or keep their money outside China.
Aside from all this, the dollar-renminbi rate is also a key weather vane of public and financial sentiment, often reflecting what’s going on in the Chinese economy, and whether foreigners are putting money into China or, as this year, taking it out. Its fluctuations also signal the extent to which Chinese residents’ capital is flowing out of China.
In line with its obvious concerns, China’s central bank had previously announced measures last week designed to make it more expensive for traders to take positions against the renminbi, and ‘asked’ banks to quote the renminbi-dollar rate in a way that leaves less scope to take one-way bets against the currency.
Such initiatives are unlikely to succeed in a market trending against the renminbi. The only viable option for the central bank to stem the tide and prop up the Chinese currency is to intervene using its $3 trillion pool of foreign exchange reserves, by selling some of its dollars to buy renminbi.

Such a move, though, would have important implications.
First, it would have a direct impact on China’s own monetary policy, effectively tightening financial conditions when the central bank is anxious to make them as easy as possible to alleviate the country’s economic slowdown. The PBOC could try to offset this by reducing already low Chinese interest rates, but that would only exacerbate its compromised position — easing policy for domestic reasons but tightening it to defend the renminbi. Markets know that doesn’t work.
Second, if the Chinese central bank were to sell dollar securities on a large scale, it would probably affect U.S. and global markets negatively. For sure, when China last sold off its reserves to support the renminbi, in 2015-16, the broader impact was limited. But today’s global context is different. Concerns about inflation and monetary policy tightening have led to widespread fragility in international capital markets: in these circumstances, a big intervention by the Chinese central bank could have much more serious and unsettling consequences both inside and outside China.
In the end, the renminbi is hostage to the dollar cycle — over which Chinese policymakers have no control — and developments in the Chinese economy, where they have rather more agency.
The dollar’s uptrend isn’t going to go on in perpetuity: at some stage there will be a pullback. Any such move would provide relief for the renminbi. Pressure could also be relieved when U.S. interest rates start falling again or if global tensions with Russia and China were to subside. Yet no one should count on early resolution of the latter, and the former may take some time yet.
In any event, the Chinese economy is likely to prove of more enduring importance for the direction of the renminbi. Foreigners who poured money into China’s financial markets in 2020-21 withdrew over $150 billion earlier this year, before conditions stabilized in the late summer. Surveys of foreign businesses in China suggest the proportion looking outside China for future investment is rising.
The principal catalysts for this change in sentiment are neither fleeting nor trivial, and all have undermined confidence in China’s political and economic leadership. Beijing’s zero-Covid policies and the slump in China’s property market — alongside the stall in the economy necessitating easier monetary policy — have all dragged down sentiment towards the country, and hence its currency.
Lower growth and a weaker currency mean that China’s much heralded overtaking of US GDP is looking as though it might not happen at all.
Two other less measurable but significant factors have also weakened investor confidence: the rising angst about the Leninist turn in Chinese politics, business regulations and governance, and the increasingly Marxist influence over economic policy; and China’s support for Russia’s war in Ukraine, which has accentuated the trends awards decoupling and self-reliance, and shocked businesses into taking on board sanctions and geopolitical risks.
Those looking to the much anticipated 20th Congress of the Chinese Communist Party this month as a pivot point for meaningful change for the better are conflating Chinese party politics with elections in capitalist democracies, and will be disappointed. The Congress is important for many reasons, but is likely to represent continuity and consolidation as far as Chinese politics and economic policies are concerned.
Given this background, the likelihood of much lower growth and loose policies in future suggest that, short cycles notwithstanding, the renminbi will continue to depreciate, albeit not in a straight line.
Aside from the knock-on effects on China and for global markets, it is worth noting that because of this depreciation, China’s GDP in dollar terms is already about 10-15 percent smaller this year than might otherwise have been expected. Lower growth and a weaker currency mean that China’s much heralded overtaking of US GDP is looking as though it might not happen at all.

George Magnus, a research associate at the University of Oxford’s China Centre and SOAS University of London, is the author of Red Flags: Why Xi’s China Is in Jeopardy (Yale University Press, 2018).