Continuous Strengthening of the Yuan... China Caught Between Inflation and Exports

Exchange Rate Fixed at 6.3682 Yuan as of 31st
Yuan Strengthens for 5 Consecutive Trading Days

Yuan Strength Allowed to Control Import Prices
Concerns Raised Over Exporters' Profitability

Possibility of Yuan Speed Adjustment Emerges

[Asia Economy Beijing=Special Correspondent Jo Young-shin] Concerns about the strengthening of the Chinese yuan have begun to emerge within China. The Chinese yuan exchange rate, which had been stagnant until March this year, turned strong again from April, recording 6.3858 yuan per dollar on the 28th. The yuan falling to the 6.3 yuan range is the first time in three years since June 2018. Subsequently, on the 31st, the People's Bank of China announced the benchmark exchange rate at 6.3682 yuan, down 0.28% from the previous session. A decline in the dollar-yuan exchange rate means the yuan's value has increased.

In response, Chinese media such as Xinhua News Agency, Global Times, and Pengpai simultaneously reported on the 31st that market anxiety is growing due to the rapid strengthening of the yuan, warning that Chinese export companies and small and medium-sized enterprises may face difficulties because of the yuan's appreciation. They pointed out that if the yuan's strength continues, the profitability of companies' exports could decline. Attention is focused on the Chinese authorities' response.

The Yuan's Increased Value

The yuan has continuously depreciated since its peak of 7.1316 yuan per dollar on May 29 last year. This was driven by expectations that the Chinese economy would recover as COVID-19 came under control. Subsequently, optimistic forecasts about the Chinese economy emerged in various places, leading to an inflow of overseas funds and accelerating the yuan's appreciation.

At the beginning of this year, the yuan's strength showed a fluctuating sideways trend but turned strong again in April, appreciating by 1.3% over the month. In May, the pace accelerated further, leaving market participants visibly unsettled.

[Image source=Yonhap News]

On the 23rd, Liu Guochang, Deputy Governor of the People's Bank of China, stated, "The recent yuan appreciation is a result of supply and demand in the foreign exchange market and changes in the international financial market, and Chinese financial authorities will maintain the yuan at a reasonable and balanced level," but the market seems unconcerned.

Direction of the Yuan Exchange Rate's Balance

To minimize the impact of rising international commodity prices, yuan appreciation is the answer. This is especially true given that the Chinese government's economic policy direction this year is 'dual circulation' (promoting both exports and domestic consumption). Yuan appreciation can lower the prices of imported goods, which helps stabilize prices. Within China, the dominant view was that the government would tolerate yuan appreciation to control import prices.

However, there is also significant opposition arguing that the speed and magnitude of the appreciation are too rapid, potentially worsening the profitability of Chinese export companies.

Professor Sheng Songcheng of the China Europe International Business School, who formerly served as Director of the Statistics Department at the People's Bank of China, emphasized in an interview with Xinhua News Agency, "Yuan appreciation can worsen the profitability of export companies, especially small and medium-sized enterprises," adding, "Rapid exchange rate fluctuations can damage the real economy, so active support from financial institutions is necessary."

China's Possibility of Adjusting the Yuan's Pace

Global Times reported on the same day that yuan appreciation could harm export companies and that the yuan's strength has reached a level that cannot be ignored.

There is growing weight to the argument that Chinese foreign exchange authorities cannot continuously tolerate yuan appreciation considering the profitability of export companies.

In fact, Professor Sheng pointed out that the current yuan appreciation appears to be an overshoot. Until last year, expectations for China's economic recovery and increased foreign direct investment led to yuan strength, but the recent rapid decline in the yuan deviates from market forecasts.

Chinese experts predict that if the U.S. economy rebounds fully in the second half of the year, the yuan's strength will weaken. They expect the interest rate spread between U.S. Treasury bonds (10-year) and Chinese bonds to narrow again, and overseas funds flowing into China to decrease.

Professor Sheng added, "China encourages external openness and long-term capital investment but will block large-scale short-term capital inflows," noting, "Yuan appreciation weakens the competitiveness of Chinese export companies and hinders China's independent exchange rate policy."

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