Ups and downs of renminbi

Short-term capital flows make exchange rate more volatile, posing new challenges for decision-makers in China and US

From July 2005 until December last year, China's renminbi appreciated steadily. The exchange rate then unexpectedly fell, hitting the bottom of the daily trading band set by the People's Bank of China for 11 sessions in a row. Though the renminbi has since returned to its previous trajectory of slow appreciation, the episode may have signaled a permanent change in the pattern of the exchange rate's movement.

As long as China was running a trade surplus and receiving net inflows of foreign direct investment, the renminbi remained under upward pressure. Short-term capital flows had little impact on the direction of the renminbi's exchange rate.