China Center Chart Dive: The CFETS Basket and RMB Valuation—How It Works and Why It Matters

Just over a year ago – between Aug 11 and 13, 2015 – the RMB plummeted 4.66 percent against the USD over a three-day period as China devalued its currency and rewired a key aspect of its exchange rate management system. This poorly communicated policy shift shook global markets and triggered a surge in capital flight as uncertainty about the RMB’s future took hold. Over the subsequent months, China worked to reduce the resulting capital outflows, stabilize the RMB’s offshore value, and explain its new exchange rate system. One year later, things have stabilized somewhat, but it appears that the RMB has embarked on a path of gradual depreciation. This paradigm shift is a function of a variety of factors that are important for MNCs to understand, but can be summarized thusly: China is now managing its currency in relation to a basket of currencies, not just the USD.