UNITED STATES – While the yuan is trading near the high against the dollar since the devaluation of 2015, do not expect that the Chinese government will soon provoke a currency turnaround, Bloomberg reports with reference to Morgan Stanley
Beijing is now allowing a strong yuan, as it helps increase consumption and attract capital inflows, said Hans Redeker, head of currency strategy at Morgan Stanley. Given that China has the world’s largest foreign exchange reserves and is the largest trading partner, it means that the weakness of the dollar will persist.
“Strengthening the yuan is a signal for the region, if not for the whole world,” Redeker said. “It says that China sees advantages in a weak dollar, which is the opposite side of a strong yuan, as a weak dollar helps support the global economy through loans.”
In addition, since world demand supports trade, the Chinese government may be less concerned about the impact of the export rate.
The Yuan grew by almost 7% against the dollar in 2017. Nevertheless, last year China demonstrated a strong growth in exports, due not only to improving global demand, but also to efforts to diversify its markets outside the US. This step made Chinese politicians pay more attention to assessing the value of the renminbi against the basket of currencies of major trading partners.
The trade-weighted index of CFETS RMB was stable last year, which limited the net impact on China’s exports. But if other currencies in the basket fell relatively more against the dollar than the yuan, this could increase trade-weighted value and create some difficulties. The dollar has the largest weight in the basket of currencies, followed by the euro and the yen. However, in recent years, Beijing almost doubled the number of currencies in the basket to 24.
A weak dollar may be a point of intersection of interests between China and the US, noted in Morgan Stanley. The US can view the weakness of the dollar as the “fastest and most effective way” to increase competitiveness, wrote a bank strategist led by Redeker in a note dated February 2.
Meanwhile, the Chinese authorities are not in a hurry to weaken the control over the movement of capital. This underlines the continuing concerns about the resumption of downward pressure on the currency and the risks of another outflow of capital, similar to that observed in 2014-2016.
“We should not worry too much about the appreciation of the renminbi,” Reuters said last week, “In the short and medium term, the appreciation of the yuan may come to naught, instead we must prevent the weakening of the renminbi.”
However, there are signs that China wants to slow the growth of the yuan, although these efforts have not yet produced any notable results. On Wednesday, the average RMB exchange rate was set at a lower level than expected. The discrepancy between the fixing and the consensus forecast of analysts polled by Bloomberg was the highest since October.
At the beginning of the year the People’s Bank of China changed the formula for the reference rate of the yuan, eliminating the countercyclical factor from it. China began to use the countercyclical factor last year to reduce the volatility of the yuan, which declined for three consecutive years.