Understanding the renminbi’s exchange rate

There are two approaches to the renminbi’s exchange rate: First, its endogenous determinants; the RMB exchange rate depends on China's trade balance, its attractiveness for international capital (interest rates, growth, etc.) and the amount of Chinese investments abroad (capital outflows other than those of the central bank); Second, the objectives of the Chinese government and the central bank; do they want to prevent the renminbi from appreciating (through low interest rates, the authorisation of capital outflows, the accumulation of foreign exchange reserves, etc.) to boost China’s cost competitiveness or do they want to promote the appreciation of the renminbi to reduce the cost of imported commodities and improve the terms of trade? In the most recent period, the clear choice has been to prevent a further appreciation of the renminbi (increase in mandatory reserves – from 5% to 7% – on banks’ foreign-currency deposits, facilitation of foreign investments for Chinese institutional investors), which may come as a surprise.