What makes a currency “stable”? – Commerzbank

According to the State Administration of Foreign Exchange (SAFE), 53 percent of China’s foreign trade was denominated in renminbi last month. This means that the use of RMB has developed very strongly in recent years. Just last year, the RMB overtook the US dollar as the number one currency. Before the pandemic, roughly twice as much of China’s foreign trade was priced in US dollars as in the domestic currency, notes Commerzbank currency analyst Volkmar Baur.

China is adapting its monetary policy to the US economic situation

“The relative stability of CNY/USD in recent months is often cited as a key factor. Indeed, the historical volatility of the CNY/USD exchange rate has been significantly lower on average this year than in recent years, sometimes reaching 9-year lows. If the CNY fluctuated more against the USD, it said, trading partners would not be convinced to price goods in CNY. Therefore, it is (or was) necessary to manage the CNY more closely against the USD.”

“What China is doing with the renminbi is exactly wrong. By focusing its monetary policy on managing its currency against the USD, it adapts its monetary policy to the economic situation in the US instead of focusing on its own situation. At the moment, this means that China’s monetary policy appears to be too restrictive in the face of very low inflation and weak economic growth.”

“At some point, however, the Chinese central bank will have to decouple from the USD. It is possible that due to some path dependence, many trading partners will continue to price their goods in RMB, even if the CNY again fluctuates more against the USD. However, it is also possible that many will then switch back to USD. In this case, the RMB’s temporarily higher share of China’s foreign trade would be a pyrrhic victory.”