Thoughts on the strengthening yuan

CHINA ADVISORY - Report 26 Aug 2020 by Andrew Collier

There has been speculation that the recent rise of the yuan will reverse course. The currency strength is encouraging inflows. Clearly, a lower valued currency would encourage exports. However, I estimate that Beijing will not depreciate the yuan, for several reasons.

First, the PBOC has tended not to make drastic changes in the value of the currency because of:

a) Concerns about setting off alarm bells within the Trump Administration that could accelerate the trade war, and

b) Concerns about the impact on investor views of China and its economic stability. China is very careful about cultivating stable economic policies, including the currency. The collapse of the stock market in 2015 was not viewed kindly by Xi Jinping as it attracted negative attention and portrayed China as not in control of its own economy. Strong moves in the currency could put China on the front pages of the western press, which is not what the leadership wants, particularly at this juncture, when Beijing is attempting to calm the waters between the US and China.

Second, capital currency flows could explain much of the strength of the yuan. In this report, we view a number of datapoints concerning China’s currency.

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