Rattling the Renminbi

In short, because the RTSS made cross-border capital movements much easier, short-term flows have become a major factor in determining the RMB’s exchange rate. External shocks affect the offshore exchange rate first, and then feed through to the onshore exchange rate.

The RMB will continue to appreciate in the near future, owing to strong economic fundamentals, but the inherent instability of short-term capital flows will make its exchange rate more volatile. This change is bound to pose new challenges for decision makers in the United States and China, particularly as they engage in a fresh round of debate about China’s exchange-rate policy.

Yu Yongding, President of the China Society of World Economics, is a former member of the monetary policy committee of the Peoples’ Bank of China and former Director of the Chinese Academy of Sciences Institute of World Economics and Politics.

Copyright: Project Syndicate, 2012.www.project-syndicate.org

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