The situation was so grim that some international investors and economists suggested that the government would have to give up on managing housing prices and focus, instead, on propping up the exchange rate, as Japan, Russia, and South Asian economies had done. China, they argued, could not allow its hard-earned foreign-exchange reserves to slip away.

China’s three-trillion-dollar question: the yuan or forex reserves?

But, after partly decoupling the renminbi from the dollar in August 2015, the People’s Bank of China tried hard not to intervene to boost the renminbi’s value. As China’s economic growth continued to decline and America’s continued to recover, the renminbi’s exchange rate continued to fall.

Some observers might have wondered whether the PBOC purposely allowed the depreciation to boost China’s trade competitiveness in advance of a potential victory by Trump in the US election – a result that many assumed would weaken the US dollar. Perhaps it did. But it did not actively devalue the renminbi.

The Chinese central bank took these steps before Trump’s January inauguration. Given Trump’s accusations of currency manipulation by China, that was good timing, regardless of the fact that the PBOC’s intervention was aimed at strengthening, not weakening, the renminbi.

Enduring restrictions on short-term capital outflows, however, could still become a target, though such criticism, too, would be unwarranted.

China’s regulation of cross-border capital flows has long been a contentious subject. A few years ago, most economists recommended that China liberalise the capital account, thereby eliminating a key institutional barrier to the establishment of Shanghai as an international financial centre and of the renminbi as an international reserve currency.

But, according to respected economists like Justin Yifu Lin and Yu Yongding, the full liberalisation of China’s capital account would be highly risky for China. They also point out that there is little evidence backing claims that free cross-border capital flows are necessary for continued economic development.

As recent experience shows, China’s use of adjustable quotas for qualified foreign and domestic institutional investors to manage short-term cross-border capital flows remains a valuable tactic for protecting its exchange rate and foreign-exchange reserves. As a country with considerable savings and an underdeveloped financial market, China knows that it must be careful.

PBOC’s hands tied because of sustained capital outflows

To be sure, when China’s economic situation has called for it, the authorities have taken steps to reduce restrictions on capital flows. Some 20 years ago, China began to allow – even encourage – current-account liberalisation, in order to attract inflows of foreign direct investment into its manufacturing sector and boost exports and economic growth. But it was not until 2008 that Chinese policymakers – seeking to offset the upward pressure that high capital inflows were placing on the renminbi – allowed local enterprises to invest abroad. And even then, such investments could be made only in specific circumstances.

At that time, overseas investments and acquisitions by Chinese enterprises were being strongly encouraged, in order to provide an outlet for the excess capital and production capacity that had emerged following the 2008 global financial crisis.

Deng used to tell Chinese officials that, when faced with new challenges, one should “stay calm, hold one’s ground, and respond”. So far, that is what China has done, pursuing cautious financial liberalisation according to its own needs and logic. Whatever Trump says, that does not make China an enemy of America.

Zhang Jun is professor of economics and director of the China Centre for Economic Studies at Fudan University. Copyright: Project Syndicate