PBOC issues policy stance on the RMB exchange rate: there is no simple linear relationship between the exchange rate and the current account.

Title context: PBOC issues policy stance on the RMB exchange rate: there is no simple linear relationship between the exchange rate and the current account. Text: On October 8, the People's Bank of China's policy stance on the RMB exchange rate pointed out that there is no simple linear relationship between the exchange rate and the current account. The exchange rate is a price relationship between currencies and is affected by multiple factors such as economic growth, monetary policy, financial markets, geopolitics, and sudden risk events. To analyze exchange rate changes, one must look not only at trade in goods but also at trade in services; not only at the current account but also at the financial account; and not only at economic fundamentals but also at factors such as expectations. It mentioned that the market should be allowed to play a decisive role in exchange rate formation. After years of development, China has gradually formed a fully functional, multi-level foreign exchange market system. The depth and breadth of the foreign exchange market have continued to expand, market entities participate independently in foreign exchange transactions based on commercial principles, and market supply and demand play a decisive role in the formation of the RMB exchange rate. The People's Bank of China does not preset a target level for the exchange rate, does not intervene in the long-term trend of the exchange rate, and maintains exchange rate flexibility and two-way floating. After 2017, the People's Bank of China withdrew from normalized foreign exchange intervention. It mentioned that medium- and long-term policy commitments are more conducive to stabilizing expectations. All countries should formulate medium- and long-term policy plans, make clear commitments and firmly implement them, and avoid repeatedly "flipping pancakes." Trying to resolve global economic structural problems within one to two years is unrealistic, and abrupt short-term policy reversals may be counterproductive. For example, the global tariff war in 2025 triggered "front-loading of imports," exacerbated imbalances, and harmed global economic growth. The original text is as follows: The People's Bank of China's Policy Stance on the RMB Exchange Rate As an important price in the financial market, the RMB exchange rate has long attracted attention from all sectors, and recently there has been increased discussion. The People's Bank of China's policy stance on the RMB exchange rate is hereby clarified as follows. China implements a managed floating exchange rate regime based on market supply and demand and adjusted with reference to a basket of currencies, and insists on letting the market play a decisive role in exchange rate formation. Over the past more than two decades, the RMB exchange rate has floated in both directions; since 2010, the RMB exchange rate has experienced multiple rounds of appreciation and depreciation cycles, with the two-way floating characteristic becoming more pronounced and flexibility increasing. China's trade development is rooted in the improvement of its industrial international competitiveness. China has no need and no intention to gain trade competitive advantage through exchange rate depreciation, and has never engaged in competitive currency devaluation. The exchange rate is affected by multiple factors such as economic growth, monetary policy, financial markets, geopolitics, and sudden risk events, and there is no simple linear relationship between it and the current account. Internationally, methods for assessing the equilibrium exchange rate level are still immature. Using individual assessment conclusions as the "official basis" for claiming that the RMB exchange rate is undervalued is a distortion and misuse of the assessment results. Global economic imbalances are closely related to the evolution of the global division of labor, the inherent contradictions of the international monetary system, and the long-term high fiscal deficits and high consumption of some countries, and all parties need to work together to promote solutions. Simply attributing a country's declining industrial competitiveness, weakened fiscal and financial constraints, and complex structural problems to other countries' exchange rates is a shirking and evasion of one's own adjustment responsibilities. China has made positive contributions to multiple rounds of dynamic global economic rebalancing. During the "15th Five-Year Plan" period, it will persist in advancing the transformation of the economic growth model, expand domestic demand, improve the business environment, deepen high-level opening up, and promote the global economy's development in a more open, inclusive, and balanced direction. I. China's Exchange Rate Regime Arrangements Market-oriented reform of the RMB exchange rate is an important component of building a socialist market economy system, and China's direction in advancing market-oriented reform of the RMB exchange rate is firm and consistent. In 1993, the Third Plenary Session of the 14th CPC Central Committee proposed establishing a managed floating exchange rate regime based on market supply and demand. In 2003, the Third Plenary Session of the 16th CPC Central Committee required improving the RMB exchange rate formation mechanism. In 2005, the market-oriented formation mechanism reform of the RMB exchange rate was deepened. In 2013, the Third Plenary Session of the 18th CPC Central Committee further made important arrangements for improving the market-oriented formation mechanism of the RMB exchange rate. As a major economy, a market-based exchange rate mechanism conforms to China's strategic interests and development needs, and also provides important support for improving the autonomy and effectiveness of monetary policy. What China implements is a managed floating exchange rate regime based on market supply and demand and adjusted with reference to a basket of currencies. China's exchange rate regime has the following characteristics: First, it insists on letting the market play a decisive role in exchange rate formation. After years of development, China has gradually formed a fully functional, multi-level foreign exchange market system. The depth and breadth of the foreign exchange market have continued to expand, market entities participate independently in foreign exchange transactions based on commercial principles, and market supply and demand play a decisive role in the formation of the RMB exchange rate. The People's Bank of China does not preset a target level for the exchange rate, does not intervene in the long-term trend of the exchange rate, and maintains exchange rate flexibility and two-way floating. After 2017, the People's Bank of China withdrew from normalized foreign exchange intervention. Second, the focus is on preventing short-term large fluctuations in the exchange rate, especially sharp short-term depreciation, from affecting financial stability. Under specific scenarios, such as sudden epidemics and major external shocks such as the tariff war in April 2025, the People's Bank of China uses macroprudential management tools to adjust and guide expectations, and even directly conducts foreign exchange intervention under extreme scenarios, to correct the market's "herd effect" and irrational expectations, especially the self-reinforcement of irrational depreciation expectations, and prevent short-term destructive overshooting of the exchange rate. These measures conform to international rules and practices. For example, during the 2008 international financial crisis, the currencies of some emerging economies fluctuated sharply, and the relevant countries carried out foreign exchange intervention to avoid excessive depreciation of their currencies triggering financial risks. In July 2026, the yen once depreciated to a nearly 40-year low against the U.S. dollar, triggering joint intervention by relevant countries. Third, continuously enhance the transparency of exchange rate policy. Since 2016, China has published international balance of payments and related foreign exchange data in accordance with the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) and at a higher international standard, continuously improving the dimensions and frequency of data publication. China actively responds to the initiatives of international organizations and will further report foreign exchange-related data to the IMF starting in 2027. II. Changes in the RMB Exchange Rate Level Since the 2005 exchange rate reform, the RMB exchange rate has floated in both directions and has generally remained strong among major international currencies. From the perspective of bilateral exchange rates, the RMB exchange rate against the U.S. dollar appreciated from 8.27 yuan at the July 2005 exchange rate reform to around 6.7 yuan at present, a cumulative appreciation of 23%. From the perspective of multilateral exchange rates, since the 2005 exchange rate reform, the RMB nominal effective exchange rate measured by the Bank for International Settlements has appreciated by more than 50%, and the real effective exchange rate has appreciated by 35%. After 2010, periods of RMB exchange rate appreciation and depreciation alternated, the two-way floating characteristic became more obvious, and exchange rate flexibility increased significantly. The RMB exchange rate against the U.S. dollar has experienced three rounds of appreciation cycles and three rounds of depreciation cycles, generally operating within a wide range of 6.04-7.35 yuan, and the fluctuation range of the RMB exchange rate in each round of appreciation or depreciation cycles was above 10%. Since 2025, the RMB exchange rate has floated in both directions and appreciated in an orderly manner. Since 2025, the RMB exchange rate against the U.S. dollar has cumulatively appreciated by about 9%. In particular, since 2026, the U.S. dollar index and U.S. Treasury yields have risen relatively quickly, non-U.S. currencies have generally depreciated, and the RMB exchange rate against the U.S. dollar has generally continued its appreciation trend. Looking ahead, the factors affecting the RMB exchange rate are relatively diverse, and both factors driving appreciation and depreciation exist, so the direction of the exchange rate remains uncertain. III. China Has No Need and No Intention to Gain Trade Competitive Advantage Through Exchange Rate Depreciation China's trade development is rooted in the improvement of its industrial international competitiveness. Historically, the world's major trade surplus countries have basically been countries with relatively strong industrial competitiveness. China's trade growth benefits from more than 40 years of reform and opening up, from its super-large market, complete industrial chain and infrastructure system, abundant, high-quality, and hardworking labor resources, and sustained R&D and innovation capabilities. Apart from China, some economies' products fit international demand, and their exports have also grown rapidly, not driven by currency depreciation. In the past, multiple rounds of RMB appreciation did not affect China's trade development, and during depreciation periods China's export share did not rise faster either. From 2005-2008, the RMB appreciated 21% against the U.S. dollar, from 2010-2014 it appreciated 10%, and from 2020-2021 it appreciated 9%. During the same periods, China's share of global exports rose by 2.4, 2.8, and 1.7 percentage points, respectively. In contrast, in 2016 the RMB depreciated 7% against the U.S. dollar, and in 2022 the RMB depreciated by more than 8%. During the same periods, China's share of global exports fell by 0.7 percentage points in both cases. In recent years, an important structural change in China's trade is that sensitivity to exchange rate changes has declined markedly. From the perspective of trade structure, China's export structure has transformed and upgraded, shifting from mainly low-end labor-intensive products to mid- to high-end and diversified products. Over the past 5 years, China's imports and exports of high-tech products grew at an average annual rate of 7.9%, and in 2025 the year-on-year growth rate further rose to 11.4%, contributing nearly 60% to overall foreign trade growth. Chinese exporters are no longer simply price takers, but are embedded in global supply chains and can share exchange rate costs with upstream and downstream enterprises. From the perspective of trade-related financial services, foreign trade enterprises use more exchange rate hedging tools, about 30% of trade is settled in RMB, and the proportion of enterprises' foreign exchange hedging is also around 30%, further reducing trade sensitivity to exchange rate fluctuations. In the future, these proportions are expected to rise further. China is a responsible major country. In past multiple rounds of high-intensity external shocks, it has never engaged in competitive currency devaluation and has never taken advantage of the situation to push the RMB down to promote exports. During the Asian financial crisis in the 1990s, the currencies of some countries depreciated sharply, and the Chinese government promised not to devalue the RMB, playing an important role in safeguarding regional economic and financial stability. During the 2008 international financial crisis, the currencies of many countries depreciated sharply against the U.S. dollar, while the RMB remained basically stable. In recent years, relevant countries launched trade wars, and the Federal Reserve raised interest rates sharply and steeply. Non-U.S. dollar currencies generally faced greater depreciation pressure, and the People's Bank of China took timely macroprudential policy measures to prevent overshooting of the RMB exchange rate in the direction of depreciation. The global foreign exchange market has an enormous trading volume, making it very difficult to sustain intervention and influence the foreign exchange market. In 2025, average daily global foreign exchange market turnover was nearly 10 trillion U.S. dollars, of which average daily RMB foreign exchange turnover exceeded 800 billion U.S. dollars, with offshore market transactions accounting for about 80%. Every transaction affects exchange rate movements. Central banks basically do not have the intervention strength to influence the medium- and long-term trend of exchange rates, and a country cannot continuously strengthen trade competitiveness simply by keeping its exchange rate low for a long time. IV. There Is No Simple Linear Relationship Between the Exchange Rate and the Current Account The exchange rate is a price relationship between currencies and is affected by multiple factors such as economic growth, monetary policy, financial markets, geopolitics, and sudden risk events. To analyze exchange rate changes, one must look not only at trade in goods but also at trade in services; not only at the current account but also at the financial account; and not only at economic fundamentals but also at factors such as expectations. From the trade channel perspective, historically, the trade channel once played an important role in exchange rate formation. After the collapse of the Bretton Woods system in the 1970s, financial liberalization and globalization continued to advance, and the ratio of global trade volume to global foreign exchange trading volume fell from about 1/35 in the 1990s to 1/70 in 2025, with the correlation between trade and exchange rates gradually declining. From the financial account perspective, since the beginning of this century, as countries' financial assets have continued to accumulate, changes in financial asset valuations and cross-border asset allocation have had a greater impact on global imbalances, and spillover effects have strengthened. From historical experience, sharp exchange rate fluctuations in emerging markets are often triggered by capital flows under the financial account. From 2014-2016, the Federal Reserve exited quantitative easing monetary policy, and after 2022, central banks in developed economies such as the United States and Europe sharply tightened monetary policy, both triggering capital outflows and currency depreciation in emerging markets. In the first half of 2026, South Korea's current account surplus grew substantially amid the AI development boom, but the won continued to depreciate, mainly due to capital flows; during the same period, Japan's current account surplus increased somewhat, but the yen also continued to weaken. From the expectations perspective, in 2025 relevant countries launched a tariff war, and China faced the highest tariff threat at one point, which affected market expectations. Although China maintained a relatively large current account surplus during the same period, the exchange rate still came under pressure. Recently, repeated U.S.-Iran maneuvering over the issue of navigation through the Strait of Hormuz has intensified market uncertainty. Once news of deteriorating conditions appears, it triggers a rise in international oil prices and leads to depreciation of the currencies of some oil-importing countries. In reality, there is no linear relationship between the current account and the exchange rate. On the one hand, a current account surplus does not necessarily mean that the domestic currency exchange rate is undervalued and needs to appreciate. In recent years, many current account surplus countries such as Japan, Switzerland, and Germany have seen their domestic currencies depreciate. From China's situation, the funds flowing in from the current account surplus are in turn used globally through outward investment by enterprises and banks, and the international balance of payments remains basically balanced. A current account surplus does not necessarily drive domestic currency appreciation. On the other hand, a current account deficit does not necessarily mean domestic currency depreciation. The United States has long had a large current account deficit, but the U.S. dollar has generally remained strong. V. International Assessment Methods Are Generally Still Immature, Lacking Convincing Consensus Conclusions After long-term development, various types of equilibrium exchange rate assessment models have emerged in academic research. Each model relies on different theoretical foundations, data sources, parameter settings, and econometric methods. In addition, the factors affecting exchange rates are complex, so objectively speaking it is very difficult to measure the so-called equilibrium exchange rate level, and different assessment results often differ greatly. To date, it has been difficult to form convincing consensus conclusions. Using the IMF's External Balance Assessment (EBA) results as the basis for claiming that the RMB exchange rate is undervalued is a distortion and misuse of the assessment results and reflects a lack of necessary professional understanding of exchange rates. In fact, the main positioning of the External Balance Assessment is as an external imbalance analysis tool, not a specialized equilibrium exchange rate measurement model. It includes three modules: the current account model, the real effective exchange rate model, and the external sustainability approach. Among them, the current account model is the most core, aiming to measure countries' current account gaps through econometric models. On this basis, it further infers the degree of deviation of each country's real effective exchange rate. The implicit assumption of this approach is that there is a linear causal relationship between the current account and the real effective exchange rate. The IMF has also specifically established a real effective exchange rate model, including two measurement methods: the index method and the level method. The assessment results of the above three methods differ greatly and are even opposite in direction, indicating that the credibility of any single method is insufficient. What the IMF assesses is the real effective exchange rate, which should not be distorted into a view on the nominal exchange rate. The real effective exchange rate is jointly determined by the nominal effective exchange rate and relative prices at home and abroad, and more reflects the impact of a country's economic supply-demand relationship and other macroeconomic and economic structural factors. However, some views intentionally or unintentionally direct the IMF's External Balance Assessment results to the RMB nominal exchange rate, or even the RMB exchange rate against the U.S. dollar, and use them as the "official basis" for exchange rate accusations. In fact, the IMF's policy recommendations for China mainly focus on structural adjustment policies such as actively expanding domestic demand, rather than promoting RMB exchange rate appreciation. It should be noted that the External Balance Assessment has characteristics such as relatively transparent methods and continuous iterative improvement, but it also faces challenges. For example, the latest External Balance Assessment model spans 40 years and covers 52 economies, increasing the amount of sample data. During this period, the global economy and the industrial structures of various countries underwent major changes, and the model does not distinguish in parameter setting and econometric testing the structural changes and differences of the sample in the time dimension and country dimension. For another example, after adjusting variables in the existing model, the assessment results change significantly, indicating that the robustness of the model can still be further enhanced. In addition, the model's residual values are relatively large, indicating that the portion the model cannot explain is relatively high, and there is still room to improve its overall explanatory power. Overall, econometric model results can serve as a reference for academic discussion, but cannot become a strict basis for assessing a country's external imbalance and equilibrium exchange rate level. VI. Alleviating Global Imbalances Requires Joint Action by Deficit and Surplus Countries Global economic imbalances are the result of the combined effects of the evolution of the industrial division of labor, the inherent contradictions of the international monetary system, and the investment-savings gaps of various countries. They are not the responsibility of surplus countries or deficit countries alone, and all parties need to address them jointly. Historically, major industrial countries have all had current account surpluses. In the 1950s and 1960s, the United States' manufacturing value added accounted for roughly around 40% of the world total, making it the largest goods trade surplus country at the time. Since the 1970s and 1980s, the international division of labor has undergone multiple adjustments, and the concentration of current account surpluses dynamically shifted from Japan and Germany to South Korea, China's Taiwan, China's Hong Kong, and Singapore, and then to China, ASEAN, and others. Germany and South Korea have manufacturing shares above the global average and have also maintained long-term current account surpluses. In recent decades, the world's major surplus countries have constantly rotated, while the major deficit countries have remained unchanged, which is related to the inherent contradictions of the international monetary system. In an international monetary system dominated by a single sovereign currency, the issuer of the main reserve currency can implement debt and fiscal expansion for a relatively long period, supporting high consumption and low savings, and thereby forming a long-term trade deficit. This will also, to a certain extent, weaken that country's fiscal and financial constraints and manufacturing competitiveness, increasing debt and balance of payments risks. The decline in trade competitiveness of some countries reflects their own structural difficulties. Some economies have long had high energy costs, high manufacturing costs, lagging infrastructure development, rigid regulatory policies, insufficient investment in innovation and digitalization, and industrial development trapped in path dependence, weakening their domestic industries' international competitiveness. All countries should promote their own structural reforms. Deficit countries should begin fiscal consolidation and raise their domestic savings rates and industrial competitiveness; surplus countries should promote consumption and investment growth. A few countries simply attribute complex international monetary system and economic structural problems to the RMB exchange rate, which is a shirking and evasion of their own adjustment responsibilities and does not help solve the problem. In fact, it is a political maneuver under the background of protectionism and unilateralism. Medium- and long-term policy commitments are more conducive to stabilizing expectations. All countries should formulate medium- and long-term policy plans, make clear commitments and firmly implement them, and avoid repeatedly "flipping pancakes." Trying to resolve global economic structural problems within one to two years is unrealistic, and abrupt short-term policy reversals may be counterproductive. For example, the global tariff war in 2025 triggered "front-loading of imports," exacerbated imbalances, and harmed global economic growth. VII. China Is Actively Promoting the Transformation of Its Economic Growth Model and Promoting the Global Economy's Development in a More Open, Inclusive, and Balanced Direction Since the beginning of this century, the global economy has experienced multiple rounds of important dynamic rebalancing processes, and China has deeply participated in all of them and made positive contributions. From 2001-2007, after China joined the WTO, it effectively expanded global supply and restrained global inflation. After the outbreak of the 2008 international financial crisis, China expanded domestic demand with great intensity, driving the global economy and preventing it from falling into deflation, and its contribution to global economic growth stabilized at around 30%. During the pandemic, global inflation once ran high, and China's supply chain system remained stable, continuously contributing China's strength to the decline of global inflation and economic balance. In this process, China's economy itself also underwent profound structural adjustment and dynamic balancing. The ratio of China's current account surplus to GDP quickly fell from its peak of 9.9% in 2007. The contribution rate of consumption to economic growth rose from 37% in 2010 to 52% in 2025, strongly promoting global economic rebalancing. China firmly implements the strategic direction and key measures set by the "15th Five-Year Plan," persists in advancing the transformation of the economic growth model, expands domestic demand and high-level opening up, and contributes to a new round of dynamic global economic rebalancing. It insists on being led by domestic demand, vigorously boosts consumption, expands effective investment, adheres to close integration of investment in physical assets and investment in people, strengthens the domestic major circulation, and smooths the domestic and international dual circulation. It improves the business environment and provides a fair competition environment for all types of market entities. It focuses on scientific and technological innovation and promotes productivity improvement. It promotes inclusive economic growth, strives to raise residents' and households' disposable income, and improves the income distribution system and social security system. It steadily expands high-level opening up, accelerates its transformation from a major global manufacturing country into a core market for global demand, and provides new opportunities for countries around the world with China's large market. It strengthens international economic and financial cooperation, actively participates in and promotes the reform and improvement of global financial governance, and safeguards global economic and financial stability. This article is excerpted from the People's Bank of China. GMTEight editor: Chen Wenfang.