Economics: How far will the renminbi fall?

FX reserve sales could further tighten global financing conditions

Sales of FX reserves into a declining Treasury market could push US yields higher, further tightening global financial conditions. If China were to follow its peers in selling its reserves, it could lead to a doom loop that results in further dollar appreciation.

The PBoC isn’t likely to intervene like it did in 2015

Valuation effects explain the US$220bn decline in China’s FX reserves. We doubt it will actively sell any. It has a higher tolerance for exchange rate volatility. And, unlike 2015, the financial system looks well shielded from balance of payments pressures. 

China is more likely to be a disinflationary force on the global economy

The PBoC interventions so far have been aimed at controlling the pace of renminbi depreciation, rather than defending an exchange rate level. If this continues, China is likely to export disinflation, which may help to cap the rise in global bond yields.