Chinese yuan: China aims to slow yuan rise but will likely avoid drastic measures
The yuan has gained nearly 12% against the dollar since May 2020 as China leads other economies in its recovery from Covid-19 and the greenback weakens, although it has been dragged down more recently by inflows of foreign funds into bonds and stocks denominated in yuan.
But it slipped more than 0.5% this week as Beijing put in place a coordinated effort to lower expectations of further gains. A flurry of official statements warned against speculation in the currency and regulators have taken action to stem the rise.
The People’s Bank of China (PBOC) has plenty of tools to cool one-way currency bets and fend off inflows of hot money amid concerns over asset bubbles, but will act with caution to avoid scare off investors, said political sources, who are advising the government.
The PBOC, led by reform-minded Governor Yi Gang, has attempted to give market forces a greater role in the management of the yuan, as part of longer-term reforms aimed at making it a more international currency. they declared.
“The appreciation of the yuan will test the market-based approach of the PBOC, but the political tools available to the PBOC will be sufficient to deal with it,” said one of the people, who declined to say. ‘be identified because of the sensitivity of the issue.
In a statement responding to questions from Reuters, the PBOC said it “would not use the exchange rate as a tool,” and reiterated its managed floating exchange rate regime based on market supply and demand and with reference to a basket of currencies.
“The attitude of the PBOC on the exchange rate target is consistent and clear, that is, no one can accurately predict the trend of the exchange rate, the uncertainty of the exchange rate is inevitable and fluctuations in both directions are normal, ”he added. mentionned.
Policymakers fear that the yuan’s rapid gains will attract more speculative money in everything from real estate to stocks and commodities, fueling asset bubbles, with any sudden reversal in inflows that could hurt the economy.
They are also worried about the impact on Chinese exports, which remain strong for now but could run out of steam in the second half of the year as factories in other countries recover from the pandemic.
“We cannot allow a one-way appreciation of the yuan. Otherwise, there will be a vicious cycle as more capital inflows lead to appreciation and greater appreciation drives inflows,” said Xu Hongcai, deputy director of the Economic Policy Commission of the China Association of Political Science. Reuters this week.
“Over time, this could lead to domestic inflation and asset bubbles and affect national monetary policy. Excessive appreciation will be bad for financial stability and bad for exports.”
The yuan is hovering near a three-year high against the dollar and has recouped just about all of its losses since the start of the Sino-US trade war in early 2018. It is also near its all-time high by compared to a basket of commercial partners since 2016.
Bullish bets on the yuan hit a nearly six-month high, according to a Reuters poll this week, despite the string of warnings from Chinese officials.
The PBOC said in the statement that it had fully communicated with the public on the currency issue and warned against speculation.
To curb the yuan’s rise, the PBOC this week ordered financial institutions to keep more foreign currency in reserve. China’s foreign exchange regulator has also granted new quotas of around $ 10 billion for overseas investment.
The PBOC is poised to take a measured approach, tightening the conditions for some inflows, adjusting the liquidity of the forex market and using its so-called box office guidelines to run banks, the political sources said.
The PBOC bank has repeatedly said it is “out” of the regular yuan intervention, but it continues to set a midpoint in its daily forecast and Chinese state banks have been seen buying dollars in the week. last.
Some insiders expect the yuan to rise further to 6.3 per dollar this year, from around 6.4 currently, but warn its outlook remains unclear as a policy change expected by the US Federal Reserve could trigger capital outflows from China.
“The yuan could rise further in the short term, but it could start to depreciate if the United States pulls out of its stimulus package,” one of the sources said.
While the Chinese economy has rebounded to pre-pandemic levels, with record growth of 18.3% in the first quarter, its recovery remains uneven. Rising raw material costs are weighing on production and raising inflationary fears.
The government has taken steps to slow the surge in commodity prices, but with limited success, fueling speculation that it may need to use a firmer yuan to offset rising imported prices.
But central bank officials recently pointed out that the yuan would not be used as a tool to boost exports through depreciation or to offset the impact of soaring global commodity prices through appreciation.