As well as a geopolitical quagmire for China’s leadership, the Russia-Ukraine conflict has become a headache for the PBOC. It has been signalling its dissatisfaction with the strength of the renminbi in recent months. But the renminbi is one of very few currencies that have appreciated against the US dollar over the past week leaving it another 1% stronger in trade-weighted terms. The PBOC could step in more forcefully to weaken the renminbi, either directly or via state-owned banks. But it will be constrained by the desire to avoid triggering the ire of its trading partners amid already elevated tensions. And any intervention would increase China’s exposure to Western financial markets at a time when Western governments have demonstrated with sanctions on Russia their willingness to use reserves as a geopolitical weapon. Far from giving it leverage, the PBOC’s FX reserves look like an asset at risk.
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