Why make the renminbi fall?

Synopsis

China's renminbi currency depreciates by about 3% following the People's Bank of China's decision to introduce more flexibility into its Exchange Rate Mechanism. Isabella Kaminski from FT Alphaville discusses the motivations behind this move, suggesting it aligns with the International Monetary Fund's requirements for China to join the Special Drawing Rights (SDR). The introduction of flexibility typically leads to currency depreciation, contradicting the public perception that the renminbi is undervalued. Kaminski highlights significant capital outflows from China over the past three to four quarters, indicating a liquidity mismatch within the Chinese financial system. Despite having substantial US reserves, these are tied up in long-term investments, limiting access to immediate dollar liquidity necessary for international obligations. This situation raises concerns about the future valuation of the renminbi, especially in light of weak trade figures and a struggling economy.