China’s yuan rally fuels central bank debate on using currency appreciation to fight commodity price surge

Stronger yuan exchange rate against US dollar would make commodity imports cheaper, but also make Chinese exporters less price competitive

Analysts predict the yuan will gradually appreciate in coming months, given expected US dollar weakness and support from Communist Party’s 100th anniversary

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Analysts have predicted that the yuan should continue to strengthen this year against the US dollar. Photo: EPA-EFE

Published: 7:30pm, 26 May 2021Updated: 9:27am, 27 May 2021

The rally in China’s yuan in the past month has fuelled a public debate among central bank officials on whether China should tolerate greater appreciation of the yuan to help combat surging commodity prices and imported inflation.

After slipping against the US dollar for the previous four months, the yuan began to rebound in April. On Wednesday, it was changing hands at around 6.40 per dollar after briefly surpassing that level on Tuesday for the first time since June 2018. A lower US dollar-yuan figure indicates a stronger Chinese currency, since it takes fewer yuan to buy one dollar.

Last week, Zhou Chengjun, the director of the People’s Bank of China (PBOC) Finance Research Institute, said China has to eventually give up its control over the currency’s exchange rate if it wants to achieve greater global use of the yuan.

Lu Jinzhong, head of research at the PBOC’s Shanghai branch, also wrote last week in the PBOC-run magazine China Finance that a stronger yuan could help offset rising commodity prices and prevent imported inflation.

Ju Wang, senior currency strategist at HSBC, said Zhou’s comment was “a reiteration of China’s long-term foreign exchange policy goal, while the second article [by Lu] represents a policy debate on how the exchange rate should react to external shocks”.