German Chancellor Olaf Merz told fellow G7 leaders on Wednesday that China’s currency appears to be undervalued by between 20% and 30%, and he said the issue warrants discussion at the leaders’ level.
Those remarks came on the same day the People’s Bank of China made a policy announcement aimed at increasing its control over short-term funding markets. The central bank said it would move to link overnight money borrowing costs more closely to its benchmark seven-day reverse repo rate.
According to the PBOC, recent volatility in short-term markets prompted the policy adjustment. That volatility has also sparked debate about whether the central bank might eventually orient more of its policy toward the overnight rate.
PBOC Governor Pan Gongsheng, speaking at the annual Lujiazui Forum, outlined plans to expand the variety of overnight reverse repo operations. He said the bank will also improve operations for temporary overnight repo and reverse repo agreements so that short-term liquidity conditions can be managed more effectively.
Observers noted the timing of Merz’s comments and the PBOC’s announcement, with both developments arriving within the same 24-hour window. Merz emphasized the need for world leaders to address currency valuation, while Beijing signaled operational changes in its market tools intended to rein in short-term fluctuations.
The central bank’s move to more tightly link overnight borrowing costs to the seven-day reverse repo rate aims to provide clearer guidance to short-term funding markets and to reduce disruptive swings in overnight rates. Governor Pan described an intention to expand the types of overnight operations available and to refine the mechanics of temporary overnight repo and reverse repo agreements.
Neither the chancellor’s statement nor the PBOC announcement introduced new numeric estimates beyond the 20% to 30% undervaluation range cited by Merz or additional policy measures beyond those the PBOC outlined regarding overnight and temporary repo operations.
What to watch next
- Whether G7 leaders take up the currency valuation issue in subsequent discussions.
- How the PBOC’s operational adjustments to overnight and temporary repo tools affect short-term money market volatility.
- Any further signals from PBOC officials on the potential shift in policy emphasis toward overnight rates.