By Stella Yifan Xie
HONG KONG -- China's currency has continued to climb in value
this year on the back of a strong economic recovery, and Beijing
doesn't appear to be in a hurry to weaken it despite the pressure
it is putting on exporters.
The yuan has risen more than 9% against the U.S. dollar since
June on the back of an export boom and massive investment flows.
The greenback has weakened against the backdrop of a feeble U.S.
economy and low interest rates, and as investors have moved money
into riskier assets around the world.
Although the yuan rallied to the strongest level since mid-2018
to 6.46 per dollar, Beijing's official response has been relatively
mild so far. Since last fall, it has made it easier for traders to
bet on a weaker yuan, and allowed more domestic financial
institutions to move money out of the country to invest in foreign
Economists say that Beijing appears to be comfortable with a
stronger yuan now in part because it could help rebalance China's
economy toward consumption and make it cheaper for China to import
commodities and chips.
"China will evolve into a consumption-driven economy, which
means they don't have to keep an undervalued currency like a
typical emerging export-oriented economy," said Ju Wang, a Hong
Kong-based senior FX strategist at HSBC. "Beijing is already
shifting towards this new model, which means they see a
fundamentally stronger currency as more beneficial than harmful for
A stronger yuan could also boost the global status of its
currency and help ease a bone of contention with Washington, which
has long criticized China for keeping a lid on its currency to
boost the sales of made-in-China goods globally.
The yuan appreciated 8.2% against the dollar in the second half
of 2020, but it didn't derail global demand for Chinese goods from
medical equipment to home appliances. China logged $535 billion in
trade surplus last year, the highest level since 2015.
But the yuan's appreciation has added financial pressure to
Chinese exporters, who were already hammered by an unexpected surge
in costs, ranging from raw materials to shipping, due to the
Covid-19 pandemic. Some say they are now planning to pass on some
of those costs to customers.
Xue Dong, chief executive at Anji Wanbao Smart Home Technology
Co., which sells office chairs mostly to the U.S. and some European
countries, said they plan to raise the price across the board by 5%
later this month.
"We've been shouldering the loss by ourselves and barely made
any money last year," he said.
Bao Jimi, a saleswoman at a nonwoven fabric exporter in
Shanghai, said they were also caught off guard by the sudden rise
in the yuan's value last year. The company in January increased the
price on some products to cover the losses incurred by a stronger
yuan to protect its 10% profit margin.
"Most of our new clients can accept the new price, but it'll
take some time to negotiate with existing clients," she said.
Economists say that one reason Beijing may be holding off on
more-aggressive currency measures is that the forces that pushed up
the yuan's value last year may taper off. China's expansion in
exports last year could be temporary, especially if the
manufacturing sectors improve in more countries as vaccine rollouts
Goldman Sachs in January raised the forecast for the U.S.'s
gross-domestic product growth to 6.8% in 2021, citing expectation
of a larger stimulus package. China's economy is expected to expand
by around 8% this year.
Policy makers in Beijing see a limit to how much the export
sector can sustain its growth momentum. Ma Jun, a member of the
monetary policy committee of China's central bank, warned in
January that a further 5% or more appreciation of the yuan would
put "obvious pressure" on the country's export sector.
Mr. Ma said the country should continue easing some of its
capital controls, reducing the appreciation pressure by letting
more money exit the country.
"For Beijing, capital outflow is a far more worrying scenario
than inflows," said Fraser Howie, co-author of the book "Red
Capitalism." "I don't see any evidence of panic [from the
Chinese authorities have already taken several measures to tame
the currency's rise. Last September, after a 17-month pause, China
began granting new overseas investment quotas that allow banks and
other financial institutions to convert more yuan into foreign
currencies to buy securities offshore. More than $21 billion have
been issued since then.
In October, Chinese regulators scrapped a reserve requirement
that had made it more costly for financial institutions to bet
against the currency's rise in value.
Chinese authorities are looking into letting individuals use the
$50,000 in foreign currency they are allowed to buy per year to
purchase offshore securities and insurance products, an official at
the State Administration of Foreign Exchange said last week.
Unlike other countries with freely trading currencies, Beijing
has long kept a tight grip over its currency through capital
controls and setting daily reference midpoints to guide the
direction of trading.
Last year, China's foreign-exchange reserves increased by $108
billion to $3.2 trillion, a sign that many economists interpreted
as Beijing's cutting back on intervening in the currency market.
Between 2014 and 2017, China's central bank burned through $1
trillion of its reserves, selling foreign currencies to prop up the
value of the yuan.
Some scholars have suggested that the central bank, in an
attempt to damp the pace of the recent rally, could have done the
reverse discreetly through state-owned banks, whose net foreign
assets surged since the second quarter of 2020. China's central
bank didn't immediately respond to a request for comment.
Many economists expect the yuan to strengthen further this
China drew a record of more than 2.3 trillion yuan ($367
billion) in portfolio investment last year from overseas to its
bond and equity market, according to data provider Wind.
"Global demand for Chinese assets is still pretty solid," said
Freddy Wong, head of Asia-Pacific for Invesco Fixed Income. "We are
getting so many inquiries from everywhere regarding what kind of
exposure to China they should get."
Michael Pettis, a professor of finance at Peking University,
said that China's outbound investment could surge this year, as
Beijing encourages greater capital outflows.
"I think they like to see a stronger yuan but also with strong
stability, " he said. "I think it's extremely unlikely that the
yuan will depreciate this year."
Write to Stella Yifan Xie at firstname.lastname@example.org
(END) Dow Jones Newswires
February 25, 2021 09:16 ET (14:16 GMT)
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