The Intentions Behind China's Foreign Exchange Authorities Accepting the Yuan's Strengthening

Foreign Capital Inflows into Stocks and Bonds Amid Expectations for China's Economic Growth
Import Competitiveness More Advantageous for Economic Growth than Export Competitiveness in China

[Asia Economy Beijing=Special Correspondent Jo Young-shin] The value of the Chinese yuan is soaring day by day, reaching its highest level in 16 months. As of the closing price on the 3rd, the yuan exchange rate was 6.8319 yuan per dollar, the lowest since May 13 of last year.

The prevailing view is that the yuan will continue to strengthen for the time being. This is because the Chinese economy is rapidly recovering from the impact of the novel coronavirus disease (COVID-19), and there is a strong expectation that the Chinese economy will perform better than expected in the second half of the year.

Accordingly, attention is focused on whether the Chinese foreign exchange authorities will intervene.

The yuan's strength is not entirely welcome from the Chinese government's perspective, as it reduces the export competitiveness of Chinese products. This is why there is a difference in perspective between Chinese and American media regarding the reasons behind the yuan's appreciation.

Xinhua News Agency explained the background of the yuan's strength on the 4th, stating, "There is a prevailing expectation that China's economic growth rate turned positive in the second quarter and will continue to be positive in the second half of the year, leading to an inflow of overseas capital into the Chinese market." It explained that demand for the yuan is increasing in foreign exchange markets such as stocks and bonds.

In fact, according to a report titled 'Foreign Investment Trends and Prospects in the Chinese Bond Market' recently released by the Bank of Korea's Beijing office, foreign investment has surged recently, with 500 billion yuan (71.4 billion dollars) flowing into the Chinese bond market as of the end of July.

[Image source=Yonhap News]

Moreover, Xinhua News Agency forecasted that demand for the yuan will increase further as the Chinese government announced plans to ease regulations such as expanding the financial market.

Gao Shanwen, chief economist at Anxin Securities, said, "The yuan's strength has increased the attractiveness of yuan-denominated assets," adding, "The yuan's appreciation will help stabilize and grow China's financial and capital markets."

On the other hand, Western media, including the United States, view that the Chinese government is tolerating the yuan's appreciation.

The perspective of Western media such as the U.S. is that the Chinese government is deliberately allowing the yuan to strengthen as part of efforts to stimulate domestic demand. While the yuan's strength reduces the export competitiveness of Chinese products, it increases the price competitiveness of imported goods.

Bloomberg stated that under the Phase One U.S.-China trade agreement, China must import U.S. agricultural and livestock products, and the yuan's appreciation can lower import prices. This, in turn, helps stimulate domestic demand in China.

Ken Cheung, an Asian currency strategist at Mizuho, said, "At this point, the export sector plays only a secondary role in China's economic growth," adding, "The yuan's strength will stimulate imports and further expand the domestic consumer market."

Bloomberg explained that despite the yuan rising more than 5% since May, Chinese foreign exchange authorities have not shown any significant moves.

Wang Ju, senior foreign exchange strategist at HSBC Holdings in Hong Kong, said, "The yuan's strength will help optimize resource allocation," adding, "Tolerance for the yuan's appreciation will increase."

Bloomberg forecasted that given China's current economic growth model, the yuan's strength is more appropriate and predicted the exchange rate to be 6.7 yuan per dollar by the end of the year.

This content was produced with the assistance of AI translation services.