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Macroscope | Why China may be ready for a strong yuan, and the US could follow up with a weak dollar policy
- The yuan could emerge as a rival to the greenback, as Beijing looks ready to adopt a de facto ‘strong yuan’ policy. And there will be room for the yuan to extend its global footprint if Washington chooses to weaken the dollar’s dominance
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The yuan could be on the rise. Although renminbi weakness against the dollar has been a feature of the ongoing trade war between China and the United States, circumstances do change.
Currently, it might suit Beijing to create conditions that favour yuan appreciation as a way of silencing US Donald Trump’s unsubstantiated assertions that China has a tendency to manipulate its currency to gain economic advantages. After all, Washington only seems to cry currency manipulation when the renminbi weakens.
As regards monetary policy, although the Federal Reserve is poised to cut US interest rates, it seems unlikely China will follow suit. As People’s Bank of China (PBOC) governor Yi Gang told Chinese magazine Caixin, “Our current interest rate levels are appropriate.”
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It makes sense not to match a Fed rate cut, as the PBOC eyes mild inflation in China. And from a currency perspective, the lack of ambiguity in the Chinese central bank chief’s statement could be construed as yuan supportive.
Moreover, it’s important that markets perceive the PBOC’s monetary policy settings as recognisably China-specific. In fostering the development of China’s own asset classes as a potential alternative to US-dollar denominated assets, it would surely make sense for the PBOC not to appear to be dancing to the Fed’s tune.
This is particularly pertinent when markets are beginning to have some doubts about the US’ commitment to its long-standing “strong dollar” policy. After all, in the long run and given China’s economic heft, the yuan could emerge as a rival to the greenback.
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