Jakarta, CNBC Indonesia – China is now trying to control its currency, the yuan, or the renminbi which surged to its highest level in 3 years against the United States (US) dollar.
A stronger yuan makes Chinese goods relatively expensive for overseas buyers. The result sparked concerns about the competitiveness of China’s exports, which are a major contributor to national economic growth.
China’s currency traded slightly weaker against the US dollar after the People’s Bank of China (PBOC), its central bank, set the yuan’s daily midpoint at 6.3773 versus greenback or U.S. dollars, on Wednesday (2/6/2021).
According to data from Wind Information, the PBOC’s move also reversed 6 consecutive trading days of gains since May 24.
The PBOC has tried to allow the market to play a bigger role in determining the yuan’s exchange rate. But the central bank retained some control by setting the daily median against the dollar, allowing the yuan to move 2% higher or lower than that level.
This weak control over the yuan follows the PBOC’s central bank announcement late Monday (31/5/2021) that starting June 15, financial institutions will have to increase their foreign exchange (forex) deposit ratios by 2 percentage points, to 7% from 5. % now.
This increase has forced banks in President Xi Jinping’s country to retain more of their foreign currency holdings, reducing the amount that can be used to influence foreign exchange rates.
It was the first increase in 14 years since the previous change in May 2007, before the financial crisis.
Economists expect the PBOC’s move will reduce the amount of foreign currency available for long-term trading by $20 billion.
Xu Hongcai, deputy director of the Economic Policy Commission at the China Policy Science Association, said Chinese authorities are trying to keep the economy growing steadily as the world tries to recover from the shock of last year’s coronavirus pandemic.
However, Beijing’s monetary policy has diverged from the US and major developed economies, making mainland Chinese assets more attractive to global investors.
The 10-year Chinese government bond yields around 3.07%, while its US counterpart has a much lower US Treasury yield of around 1.62%.
Thus, according to Xu Hongcai, this gap in bond yields has created a vicious cycle of money flowing into yuan-denominated assets and strengthening the currency, which in turn attracts more foreign capital.
On the other hand, analysts do not expect big moves in the Chinese currency this year.
China Renaissance expects the yuan to hold near 6.4 yuan against the US dollar this year and next.
Macquarie anticipates the yuan will weaken slightly to 6.55 versus the US dollar on rising expectations of tighter monetary policy in the US, a moderate trade surplus and new channels for Chinese capital to leave the country.
In May, Morgan Stanley analysts adjusted their forecasts weaker to 6.48 yuan per dollar by the end of the year, compared to 6.25 yuan earlier. The investment bank did not update the analysis to share on Tuesday evening.
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