Yuan continues to edge up in value, posing little risk to economy

With the Chinese economy recovering a long way ahead of most other economies, the continuing flow of capital into China’s bond and stock markets is expected to maintain the yuan’s appreciation trend into 2021.

The Chinese yuan has strongly appreciated against the US dollar since May. Offshore yuan closed on Friday at 6.5108 against the US dollar. So far this year, the Chinese currency has appreciated 6.5 percent in the offshore market. On the same day, the central bank’s central parity rate of the yuan, or daily trading reference, reached 6.5333 against the US dollar, representing a gain of more than 6.3 percent this year.

The yuan’s strong performance has attracted market attention and triggered discussions on its future trend. According to Liu Ligang, chief China economist at Citigroup, since a large amount of foreign capital inflows chase yuan-denominated assets, which will offer much higher yields than the rest of the world, the yuan could strengthen by up to 10 percent to hit 6 against the US dollar by the end of 2021.

Eric Robertsen, the global research head of Standard Chartered, predicted in an annual financial market report that the yuan’s rate against the greenback may rise to 6:1 in 2021.

While the appreciation of the Chinese currency represents the rise in China’s economic power, there are also concerns as to whether the strengthening currency will put on too much pressure on the country’s exporters, who may see their products become more expensive and less competitive in overseas markets.

However, given the current circumstances, it may seem too early to overplay such worries about a stronger yuan. If anything, there is some rationality in the recent appreciation of the Chinese yuan. In 2020, China effectively put the coronavirus epidemic under control and became the first major economy to recover from the COVID-19 fallout, which could be seen as one of the few stabilizers in the global economy. It is the solid economic fundamentals that have offered the strong support to the strengthening trend of the yuan’s rate.

The steady growth of the Chinese economy has ensured relatively high yields for yuan-denominated assets, attracting tens of billions of dollars of foreign capital inflows into the country in recent months. The appreciation of the yuan has also led to increased usage of the currency in trade settlement. According to a monthly SWIFT report, the Chinese yuan went up one position to regain the title of fifth most used currency in the international payment market in November.

On the whole, the appreciation of the yuan is mostly caused by structural factors relating to this country’s strong economic performances, which is unlikely to become a burden on the Chinese economy in the medium to long run. 

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