A rare trade deficit in February relieved some of the upward pressure on therenminbi, but the latest data suggest that the People’s Bank (PBOC) additionally purchased around $25bn of foreign exchange last month to force the currency to weaken. The PBOC’s hope is that the prospect of greater exchange rate volatility will deter speculative inflows of capital in future. Buteven if net non-trade flows drop to zero, the persistence of a large trade surplus over the medium term means that policymakers will still have to choose between continuing to accumulate foreign exchange – something they have said they would rather avoid – and allowing the renminbi to strengthen.
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