Yuan strength reflects dollar weakness as much as China’s economic recovery
- China’s economic situation justifies some degree of yuan appreciation, but there is more at play than just renminbi strength. Rather, the US dollar has been weakening against several currencies, and this suits American interests
Beijing needs to be vigilant on the currency front. The strength of the yuan in recent months partly reflects China’s impressive economic recovery from Covid-19 but the rise of the renminbi is not all about China. It’s also about the currency market’s wider and well-grounded disillusionment with the US dollar.
China’s own economic situation undoubtedly justifies some degree of yuan appreciation. But Beijing must also be mindful that when a rising renminbi is more a function of US dollar weakness – which Washington may not directly be pushing for but is also doing nothing to discourage – that may not suit China’s own economic interests.
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From a trade perspective, and especially in an environment of rising US dollar-denominated commodity and energy prices, a stronger yuan is useful to China, but it is a double-edged sword.
More recently, Beijing has been minded to allow market forces to determine the yuan’s external value, but there comes a point when China may feel it has a duty to act.
That rise was partly driven by broad greenback weakness that enhances the value of China’s reserve holdings of other currencies and gold when measured in US dollar terms.
Whether Beijing stepped in to buy US dollars to arrest the pace of yuan appreciation is, as yet, unclear. But what is clear is that there is more at play here than just renminbi strength.
This is US dollar weakness. Call it benign neglect if you will, and Washington might not admit it publicly, but a weaker greenback surely suits US interests currently.
A weaker greenback makes US exports more competitive and perhaps, through higher bills for imports into the United States, encourages an uptick in US consumer prices.
Such an uptick would suit the Federal Reserve, whose mandate aims for maximum employment and price stability but equates the latter with annual consumer price inflation at a flexible average level of 2 per cent.
The Bank of Canada understands exactly what is going on. “A broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar,” the central bank stated in its latest policy statement released on December 9.
Beijing should take heed. China’s economic interests now require Beijing to be vigilant on the currency front, even if Washington won’t like it. Yuan strength is no longer all about China.
Neal Kimberley is a commentator on macroeconomics and financial markets