What makes a currency ‘stable’? – Commerzbank

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

China adapts 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, at times reaching its lowest level in 9 years. If the CNY were to fluctuate more against the USD, the argument goes, trading partners would not be persuaded 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 in relation to the USD, it is adapting its monetary policy to the US economic situation 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 a certain path dependency, many trading partners will continue to price their goods in RMB, even if the CNY fluctuates more against the USD again. However, it is also possible that many will then switch back to the USD. In that case, the temporarily higher share of the RMB in China's foreign trade would be a Pyrrhic victory.”