How long will the Chinese yuan continue to rise against the US dollar before Beijing intervenes?

While currency traders have latched onto the yuan’s large interest rate premium as a sure-fire bet, the joyride won’t last forever

The key issue is how long it will be before Beijing steps in and exercises some restraint

Reading Time:3 minutes

A woman makes inquiries at a currency exchange advertising the renminbi in Kwai Chung, Hong Kong, in October 2020. The renminbi is currently running at three-year highs against the US dollar. Photo: K.Y. Cheng

Published: 3:30am, 1 Jun 2021Updated: 4:00am, 1 Jun 2021

Nobody seems that bothered about the stronger renminbi right now, least of all Beijing, despite signalling some concern. After all, it seems a better fit with the government’s new growth model, which puts greater stress on homespun recovery.

The stronger currency gives China’s consumers more purchasing power to buy cheaper goods from abroad. China’s exporters are raking in more foreign cash from buoyant overseas sales, boosting the nation’s currency reserves at the same time. The stronger exchange rate may also be superficially easing trade tensions with the US and Europe while keeping a lid on domestic prices as global inflation risks resurface.

Currency traders have latched onto the yuan’s large interest rate premium as a sure-fire bet, but there is a catch. The joyride won’t last forever and the key issue is how long it will be before Beijing steps in and exercises some restraint.

With the currency already running at three-year highs against the US dollar, the risk of intervention by the authorities must be mounting. If the market gets the bit between its teeth, momentum could soon build for a move towards 6 yuan against the US dollar, a level that nearly traded in January 2014 when the exchange rate reached a low of 6.04 yuan.

The trouble is that China’s rock solid economic fundamentals are hard to ignore, with relative growth, interest rate and bond yield differentials all heavily weighted in the renminbi’s favour. They maintain a lot of pulling power.

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