The PBOC published a policy statement on Thursday outlining its position on the exchange rate (English version HERE). While it largely reiterates positions the PBOC has expressed in the past, the unusually direct defense of currency policy carries messages for markets as well as trade partners.
Our main takeaway is that the statement reinforces our view of limited CNY upside over the next 3–6 months. First, Beijing has made clear that it does not see CNY appreciation as a solution to trade tensions. The EU and China are actively negotiating ways to resolve their trade disputes, and European policymakers have argued that CNY needs to appreciate further to ease those tensions. We have consistently argued that Beijing is unlikely to be receptive to this idea (see our report from June HERE). The statement reinforces Beijing’s rejection of the argument that a stronger currency would resolve trade imbalances.
Second, the PBOC’s unusually public statement is intended to discourage appreciation bets based on expectations that trade negotiations will force Beijing to accept a stronger CNY. A related point is its emphasis on preventing sharp currency depreciation, which we think will remain a near-term PBOC priority. Letting CNY appreciate too much while the Fed is hiking rates could significantly increase the risk of a subsequent selloff—a key lesson that PBOC draws from the 2015–16 episode. Put differently, from a risk management perspective, Beijing may prefer a CNY that remains undervalued to one vulnerable to a sharp reversal.
Most fundamentally, we think Beijing has no interest in pursuing a strong CNY policy while China’s economy is still struggling. We see continued CNY appreciation as a net drag on the economy over the medium term. Consumer goods imports amount to roughly 4% of household consumption. Making imports cheaper through exchange rate appreciation is unlikely to stimulate consumption as long as Chinese households remain in deleveraging mode. Meanwhile, a stronger CNY would weigh on exports and jobs. In comparison, we see targeted trade measures, such as cutting export tax rebates or introducing export price floors, as more favorable to Chinese government.
Finally, the statement is a subtle rebuttal to recent US efforts in the G-20 to blame China for global imbalances. Without naming the US, it argues that an international monetary system dominated by a single sovereign currency enables the reserve-currency issuer to sustain fiscal expansion, high consumption, and persistent trade deficits. While the risk that CNY becomes a sticking point in US–China negotiations is worth monitoring, this is unlikely to happen anytime soon. The Trump administration has cited the tariff-induced reduction in the bilateral trade deficit with China as a major accomplishment, even if the overall US trade deficit continues to climb. As the two sides negotiate an extension to the trade truce expiring in January, the US is far more focused on China’s rare earths export restrictions and AI competition than on trying to budge Beijing on the currency.
Appendix: Main Points From PBOC’s Statement
- China maintains a market-driven managed float referencing a currency basket.
- The renminbi moves both ways, with increasing flexibility since 2010.
- China’s trade strength reflects competitiveness, not competitive devaluation.
- Exchange rates have multiple drivers, beyond current-account balances.
- Imperfect valuation models cannot establish official proof of renminbi undervaluation.
- Global imbalances require shared adjustment, not exchange-rate blame.
- China’s 15th Five-Year Plan will boost domestic demand, reform and openness.
