China's central bank on Thursday released its policy stance on the RMB exchange rate, stating that no linear relationship exists between the current account and exchange rates.
The PBOC clarified in its statement that exchange rates represent the relative value between currencies and are influenced by a multitude of factors, including economic growth, monetary policy, financial markets, geopolitics, and unexpected risk events.
In terms of trade channels, the ratio of global trade volume to global foreign exchange trading volume has fallen from approximately 1:35 in the 1990s to 1:70 by 2025, indicating a diminishing correlation between trade and exchange rates.
The continuous accumulation of financial assets across nations since the turn of the century has amplified the impact of valuation changes and cross-border asset allocation on global imbalances, thereby intensifying spillover effects. Historical experience also shows that sharp fluctuations in the exchange rates of emerging markets are frequently triggered by capital flows in or out of a country.
However, according to the PBOC's policy stance, there is no linear relationship between the current account and exchange rates. A current account surplus does not necessarily imply that the domestic currency is undervalued or requires appreciation, and in recent years, several countries with current account surpluses, such as Japan, Switzerland, and Germany, have actually seen their currencies depreciate.
"In the case of China, funds flowing in from the current account surplus are channeled back into the global economy through outward investments by enterprises and banks, maintaining a broadly balanced balance of payments. Thus, a current account surplus does not necessarily drive an appreciation of the local currency. Conversely, a current account deficit does not inevitably lead to currency depreciation. The United States, for instance, has long run substantial current account deficits, yet the U.S. dollar has generally remained strong," said Dong Ximiao, chief economist of Merchants Union Consumer Finance.
Current account not linearly linked to currency exchange rates: PBOC
