Opinion | Why China’s central bank is caught between a rock and hard place unless it allows the renminbi to float freely

Paola Subacchi says the complexity of dealing with the devaluation of the renminbi amid the trade war underlines the need for China to allow the value of its currency to be truly determined by market forces

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Tourists enjoy a banquet held along the edge of a cliff, at Laojun Mountain in Henan province, China. Amid the US trade war, China’s central bank has had to tread a careful path on monetary policy. Photo: AFP

Published: 2:00am, 27 Jul 2018Updated: 2:48pm, 27 Jul 2018

Officials at the People’s Bank of China (PBOC) have long insisted that “China won’t weaponise the renminbi.” And yet, implicit in their promise not to manipulate the currency for strategic ends is their ability to do so if they so desired.

China’s monetary policy has come to the fore now that US President Donald Trump has imposed import tariffs on a range of Chinese goods. Many are wondering if China will respond to Trump’s trade war by threatening a currency war. If it does, the world should call its bluff.

To be sure, with more than US$3 trillion in foreign reserves and an established – albeit not entirely successful – system to manage its exchange rate, China has enough financial and monetary leverage to bring the US economy to its knees. But having the weapons it needs does not mean that China can afford to use them.

Watch: Escalating trade war affects Trump products

In June, the renminbi had its worst month on record, dropping 3.7 per cent against the dollar. Analysts are divided about the cause. Some view it as the result of a slowdown in economic growth, coupled with market concerns about the introduction of US tariffs and dollar appreciation on the back of rising US interest rates .

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