Yuan rallies on expectations that China will further open up its markets
The currency rallied after China’s central bank lifted its daily reference rate, as the two countries began talks on improving US access to mainland markets
China’s yuan rallied after the central bank lifted the daily currency reference rate up sharply Tuesday morning, signalling that China was not looking to use a currency war to retaliate against the US’ new tariff plan and amid rising speculation of a possible “New Plaza Accord”.
On Monday, a report by The Wall Street Journal said the two biggest countries in the world had quietly started talks on improving US access to Chinese markets, led by China’s vice-premier Liu He and US Treasury Secretary Steven Mnuchin.
That fuelled speculation of a possible New Plaza Accord, where China might compromise and allow further yuan appreciation to reduce the US-China trade imbalance, Ken Cheung Kin-tai, senior Asian foreign exchange strategist at Mizuho Bank said.
In any case, the yuan’s appreciation was in line with China’s move to resume the internationalisation of its currency and opening up the capital account, Cheung said.
In the 1980s, Japan was the rising Asian power that challenged that US economic prowess. And in response to US protectionism, Japan moved auto plant and production to the US and Japanese domestic producers moved up the value-added chain. The yen rose sharply in two years after the Plaza Accord in 1985.
US provocations could spur Chinese reforms, which ultimately are likely to benefit China and Chinese President Xi Jinping’s agenda, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
“China’s leadership seemed prepared to respond to the US, by objecting, making some low-scale expressions of displeasure, and seizing the opportunity to pursue long-awaited reforms,” he said.
Many observers have projected the worst-case scenario from a Sino-US trade conflict, and the prospect of so-called currency wars in the foreign exchange market, despite China’s benign response, given the retaliatory steps that seemed symbolic and the relatively small impact on trade.
On Tuesday, the People’s Bank of China raised the daily yuan reference rate by 0.60 per cent to 6.28160 against the US dollar. The level was the highest since August 10, 2015, before the central bank depreciated the currency by nearly 5 per cent in three days, which may suggest that Beijing was not pursuing a weak currency policy nor a protectionist stance.
“The yuan fixing is a gesture to show that the PBOC has no intention to escalate trade tensions,” said Jimmy Zhu, chief strategist at Fullerton Markets in Shanghai.
The yuan’s reference rate is used as a mid-point, allowing trades of up to 2 per cent on either side for the day. The onshore yuan rose to 6.2563 against the US dollar on Tuesday.