This short paper outlines the factors that have contributed to the Chinese renminbi’s strength over the past decade. The analysis highlights how these conditions largely persist and require prolonged periods to unwind during which they will continue to exert long-term upward pressure on the currency:
- China’s large positive net foreign assets position remains an important driver for longer term currency appreciation.
- Renminbi undervaluation in PPP terms should lessen with China’s relatively faster growth and rising incomes.
- PBoC latest goals for high-skilled manufacturing, services and increased domestic consumption are inconsistent with a weakening exchange rate.
- Weaker global growth points to a softer dollar and relatively stronger renminbi according to its managed FX basket weightings.
- Significant but often overlooked renminbi interest rate carry cushion provides additional potential return alongside any appreciation.