The Chinese yuan
has appreciated 10 percent against the dollar since the start of 2017, quelling
some criticism that the export giant has been deliberately suppressing its
currency to gain economic advantage over its trading partners.
This is all going according to China's
plan, experts said.
Although the strength of the yuan against the dollar is in part due to
the greenback's weakness, experts said the world's second-largest economy is
also propping up its currency to appease President Donald Trump.
China has "reversed the rise" of the dollar against the
yuan, and there's now "meaningful" strength against the greenback,
Bilal Hafeez, global head of G-10 foreign-exchange strategy at Nomura, wrote in
a recent note.
"Part of this was likely a response to the election of President
Trump and the need to avoid being labelled a currency manipulator," Hafeez
On the 2016 campaign trail, Trump repeatedly said he would name
China a currency manipulator from his first day in office. That has not
Instead, the Chinese yuan rose almost 7 percent against the dollar in
2017, reversing three consecutive years of depreciation. In January, China's
currency extended gains by another 3.5 percent.
At the same time, Beijing
repeatedly stressed its desire to keep the
currency stable — and it actually has managed to engineer this phenomenon
against a basket of different currencies.
In 2017, the China Foreign Exchange Trade
System RMB Index barely moved, starting the year at 94.83 and ending it at
94.85 — even though the yuan jumped against the dollar over the period. That
measure is a trade-weighted index of the yuan, also known as the renminbi
(RMB), as measured against a collection of currencies including the dollar,
euro and Japanese yen.
"The Chinese authorities may be attempting to keep a range-bound
[yuan] basket, which would mean ensuring euro (and yen) strength against [the
yuan] to offset dollar weakness against [the yuan]," Nomura's Hafeez said
in his note.
The CFETS RMB Index has gained about 1.3 percent so far this year.
That comes even though the dollar is the heaviest weighted in the basket, and
the greenback has lost over 2 percent against the yuan over the same period.
is walking a tightrope
But, January's spike in the yuan against the dollar was
"excessive by almost any yardstick," Cliff Tan, East Asian head of
global markets research at Bank of Tokyo-Mitsubishi UFJ, told CNBC.
So, China will probably continue to manage its currency in the
background even if it keeps its value against the dollar relatively high,
Morgan Stanley analysts said in a note this week that the
trade-weighted yuan should remain "largely stable" around current
levels as Beijing's
capital control efforts have worked.
"If [the yuan] continues to appreciate rapidly, policy-makers may
seek to stem the rise in order to maintain stability in the trade-weighted
[yuan], which would likely be achieved by verbal communication and a relaxation
of some outbound capital restrictions," Morgan Stanley added.
Beijing is walking a tricky tightrope as the Communist regime seeks to
balance political concerns with economic reforms and the demands that come with
a market-based system.
In the second half of 2015, the Chinese government shocked markets by devaluing
the yuan. That spurred capital flight due to concerns over the health of
the world's second-largest economy — which further depressed the Chinese
currency. Beijing has been trying to reverse that damage.
"I think they ultimately want a weaker currency, they just don't
know how to achieve it. They tried in 2015, it didn't work, turned into a
vicious cycle and they're kind of stuck right now with always trying to control
everything but not knowing how to get a weaker currency through a structural
slowdown in a way that does not cause a lot of disturbances to domestic
financial markets for instance," said Jason Daw, head of emerging markets
FX strategy at Societe Generale.
And then, there is the Trump factor should China be seen to
deliberately adjust its currency downward.
"Trump has complicated their efforts on doing it. But, I think
even without the Trump factor, 2015 is still too fresh in their minds as far as
what happened and them not wanting that to happen again, and losing that
control," added Daw at a recent briefing.