Economic News

Why The Yuan Is Being Strengthened By China’s Central Bank



According to experts, China’s central bank has made it clear that it wants to prevent the Chinese yuan from falling too much versus the dollar.

The People’s Bank of China declared on Monday that it will lower the minimum amount of foreign currency that banks must keep for the second time this year.

Theoretically, such actions would lessen the downward pressure on the yuan, which has fallen more than 8% against the US dollar this year, reaching two-year lows.

Chinese authorities frequently highlight the yuan’s position in relation to a currency basket, against which it has risen by 1% over the past three months.

Beijing’s most recent steps, however, demonstrate how crucial the yuan-dollar exchange rate still is, according to a study released on Monday by Ting Lu, the senior China economist at Nomura.

They presented two arguments:

“First, Chinese officials particularly worry about RMB’s bilateral exchange rate with USD because they believe RMB/USD somehow indicates relative economic and political strength in a year of the once-in-a-decade leadership upheaval and with rising US-China tensions.”


Second, a significant decline in the RMB/USD exchange rate could harm domestic morale and hasten capital flight.

A new group of leaders will be chosen by China’s ruling Communist Party in October, thereby strengthening President Xi Jinping’s position of authority.

Over the past few years, tensions between the U.S. and China have risen, leading to tariffs and sanctions against Chinese IT firms.

As a result of the pandemic shock in 2020, China’s economic development has slowed during the past three years. Many experts have lowered their GDP projections to roughly 3% as a because of this year’s tighter COVID measures, which included a two-month closure of Shanghai.

The yuan has weakened as a result of the economic slowdown, which may help make Chinese products more affordable to customers in the United States and other nations.

The U.S. Federal Reserve aggressively tightened monetary policy this year, which led to a large increase in the value of the U.S. dollar.

The euro and the Japanese yen have also fallen to 20-year lows, which has helped the dollar as measured by the U.S. dollar index.
According to a report released on Monday by Goldman Sachs analyst Maggie Wei and colleagues, the PBOC “might have tolerance for further CNY depreciation against the USD, especially as the broad USD continues to strengthen. However, they might want to avoid continued and too fast one-way depreciation if possible.”

The researchers predicted that during the next three months, the yuan will weaken to 7 versus the dollar. By the end of the year, the foreign exchange specialists at Nomura expect a level of 7.2.


Data from Wind Information show that between May 2020 and September 2019, the yuan last traded at 7.2 to the dollar.

According to Julian Evans-Pritchard, senior China economist at Capital Economics, “I don’t think it will go far beyond [7], certainly sort of beyond the 7.2 that we saw during the trade war,” in a recent interview.
He said, “I think that threshold is the key.” “I believe that if it rises above that point, expectations for the value of the currency run the risk of being unanchored, which is why they are unwilling to let it happen. You run the chance of seeing substantially higher financial outflows.

According to Wind Information, the PBOC fixed the midpoint of the yuan versus the dollar on Tuesday at 6.9096, which is the lowest value since August 25, 2020. The yuan is moderately controlled by China’s central bank, which bases its daily trading midpoint on current price levels.
Avoid placing a wager on a single issue.

The next reduction in the PBOC’s foreign currency reserve ratio, from 8% to 6%, is scheduled to go into effect on September 15th, according to a statement posted on the website of the central bank on Monday.

Liu Guoqiang, deputy governor of the PBOC, stated earlier in the day that individuals “should not bet on a certain point” and that the currency should move in two directions in the short term.

According to a translation of a Chinese version of Liu’s comments made during a press conference on economic policy, this is the case.

Liu continued to support Beijing’s long-term goals of increased yuan use abroad. The yuan will continue to gain prominence around the globe, he predicted.

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