China moves to curb yuan rally pressure due to hot money and export concerns

Chinese yuan has further strengthened more than 1 per cent so far this week, with the central parity rate reaching 6.4604 to the US dollar on Wednesday

Changes announced this week indicate a pivot in the central government’s attitude towards outflows, at least in part, due to the yuan’s sharp rise since May

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China’s yuan has strengthened more than 1 per cent so far this week, reaching 6.4604 to the US dollar on Wednesday. Photo: Reuters

Published: 7:03pm, 6 Jan 2021Updated: 11:40pm, 6 Jan 2021

The rapid appreciation in the yuan’s exchange rate has resulted in capital inflows and given rise to concerns about its effect on exports and China’s manufacturing competitiveness, with policymakers making moves this week to curb its ascent.

For now, the People’s Bank of China (PBOC), the nation’s central bank, has not intervened directly to halt or reverse the currency’s appreciation, but instead is relying on a series of measures that are meant to boost the ability of Chinese investors to buy foreign currencies, thus taking some pressure off the yuan.

Measured by the daily reference rate published by the PBOC, the Chinese currency appreciated 6.3 per cent against the US dollar last year, including 8.5 per cent in the second half. It has further strengthened more than 1 per cent so far this week, with the central parity rate reaching 6.4604 yuan to the dollar on Wednesday – the strongest level since June 2018.

The lower the figure in the US dollar-yuan exchange rate, the stronger the Chinese currency, since it means it takes fewer yuan to purchase one dollar.

The central bank has claimed for some time that it has stopped regular intervention in the foreign market, and has promoted market-driven two-way fluctuations, but its announcement of three new capital-movement measures in the past week suggests growing concern as the yuan’s rally continues.

The State Administration of Foreign Exchange (SAFE), the nation’s foreign exchange regulator, said on Wednesday that it will prevent disorderly fluctuations in the currency market. It also said it will strengthen monitoring and evaluation of currency market conditions, paying close attention to the impact of external shocks, including the pandemic, according to a statement on its website.