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Schrodinger's Cat and the Renminbi (Fall 2026 Update)
Is the renminbi undervalued or overvalued?
The answer, strangely, is "both". China's uniquely closed capital account puts currency markets in a unique state of disequilibrium, allowing the renminbi (just like Schrödinger's famed cat) to be both undervalued and overvalued at the same time.
On the one hand, the renminbi is clearly undervalued on standard BOP metrics. With sharply rising external trade and current account surpluses, there's little doubt that the renminbi is facing significant appreciation pressures on a current flow basis.
However, it is also heavily overvalued according to monetary balances. A decade of dramatic money growth at home and a quasi-fixed exchange rate have meant a massive build-up of local liquidity behind China's capital walls - putting huge depreciation pressure on the renminbi if convertibility restrictions were ever lifted.
And this bizarre state is absolutely key to understanding Chinese currency policy, i.e., why the authorities are like "deer in the headlights" when it comes to renminbi issues, with no good choices other than to (i) keep the exchange rate basically stable and (ii) keep tightening capital controls.
How To Think About Emerging Markets (2026 Edition)
An opinionated guide to emerging markets
What is an Emerging Market? (How to Think About Emerging Markets, 2026 Edition, Part 1)What's Wrong With EM? (How to Think About Emerging Markets, 2026 Edition, Part 2)
Who Makes It, Who Doesn't (How to Think About Emerging Markets, 2026 Edition, Part 3)
Is Globalization Over? (How to Think About Emerging Markets, 2026 Edition, Part 4)
Four EM Growth Fallacies (How to Think About Emerging Markets, 2026 Edition, Part 5)
An Austrian Primer: Savings, Debt and Default (How to Think About Emerging Markets, 2026 Edition, Part 6)
Life After China (How to Think About Emerging Markets, 2026 Edition, Part 7)
Macro and EM Equities (How to Think About Emerging Markets, 2026 Edition, Part 8)
Macro and EM Debt (How to Think About Emerging Markets, 2026 Edition, Part 9)
Macro and EM Currencies (How to Think About Emerging Markets, 2026 Edition, Part 10)
How To Think About China (2025 Edition)
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Lies, Damn Lies and Statistics (How to Think About China 2025 Edition, Part 1)A State Economy or a Market Economy? (How to Think About China 2025 Edition, Part 2)
The End of the Miracle (How to Think About China 2025 Edition, Part 3)
Property Boom and Property Bust (How to Think About China 2025 Edition, Part 4)
Debt, Banks and the Budget (How to Think About China 2025 Edition, Part 5)
The Future of the Renminbi and the Closing of China (How to Think About China 2025 Edition, Part 6)
The Aging Crisis (How to Think About China 2025 Edition, Part 7)
How to Follow Macro Policy (How to Think About China 2025 Edition, Part 8)
Why Haven't I Made Money? (How to Think About China 2025 Edition, Part 9)
