Renminbi rebounded in 2017, as China cracked down on illegal capital outflows disguised as investments abroad, stepped up regulations to prohibit irrational overseas investment activities, and strengthened scrutiny over irregular foreign currency purchases by individuals.
In addition, China’s relevant authorities introduced in May 2017 the “counter-cyclical factor” to the existing pricing model of the renminbi’s central parity (fixed) rate against the dollar at that time, with the objective of moderating fluctuations driven by unreasonable behavior in the foreign exchange market. Before May 2017, renminbi’s fixed rate was primarily decided by its closing price in the immediately preceding trading day and the currency’s value against a basket of other currencies. After May 2017, the counter-cyclical factor was added to the fixed rate, and this coefficient was adjusted in accordance with China’s central bank judgement of demand and supply conditions in the foreign exchange markets, risk appetite and international development in a bid to offer renminbi some support.
Owing to the above-mentioned measures, renminbi appreciated against the U.S. dollar, leading to the stabilization of capital outflows and a gradual replenishment in China’s foreign exchange reserves to $3.1193 trillion in November, versus below $3 trillion in January 2017.
In January 2018, with the renminbi gaining about 8% against the U.S. dollar since the introduction of the counter-cyclical factor mechanism, the People’s Bank of China asked the renminbi-fixing banks to withdraw the counter-cyclical factor from coming up with the exchange rates of renminbi.
Given the concerns over China’s economic outlook amid the escalating trade disputes with the U.S., the interest rate differentiation between the two countries, and fears about China’s mounting debt, as well as other factors, renminbi has displayed a downward trajectory against the dollar since April 2018.
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