China moves to cool yuan rally with series of verbal warnings

BEIJING (BLOOMBERG) – China signalled its tolerance for the yuan’s rally is fading after the authorities set the daily fixing at a weaker-than-expected level and state-run newspapers warned against rapid gains.

Beijing fixed the reference rate at 6.3682 per US dollar on Monday (May 31), versus the average estimate of 6.3656 in a Bloomberg survey. The rise in the yuan is due to short-term speculation and probably won’t last, former People’s Bank of China (PBOC) official Sheng Songcheng told state-run Xinhua News on Sunday. The central bank-backed Financial News and a former regulator also weighed in.

The chorus of comments talking down the yuan follows a subtle shift in policymakers’ stance at the end of last week after earlier messaging appeared to indicate a greater tolerance for a stronger currency. A rapidly rising yuan may draw increased scrutiny in global financial markets, especially at a time when the dollar is losing momentum.

“PBOC seems comfortable with yuan’s direction, just not the pace of its gains that was spurred by speculations of the currency being used to curb imported inflation,” said Ms Fiona Lim, senior currency analyst at Malayan Banking in Singapore. “The level of 6.20 is still possible over the next 12 months, especially if broader dollar weakness takes the dollar-yuan pair to that level.”

With China’s economy rebounding from the pandemic and foreign funds piling into the nation’s equity and bond markets, the yuan has rallied to a five-year high against a basket of trading partners’ currencies. It has climbed this year against all but six of the 31 major currencies tracked by Bloomberg, and is Asia’s best performer.

China should prevent huge short-term inflows, which could push up the yuan, hurt competitiveness of exporters and affect independent operations of the country’s financial market and monetary policy, Dr Sheng said.

Possible inflows to the United States from emerging markets and a strong global economic recovery will pose risks to China’s exports, potentially weakening the yuan, according to an editorial from Financial News. It added that the yuan may depreciate in future due to factors such as US tightening. 

The appreciation is not necessarily a bullish factor for Chinese stocks, BOC International China global chief economist Guan Tao, a former official at the country’s top foreign exchange regulator, said in an interview with state-run China Securities Journal on Monday.

That is because the country’s exporters will come under pressure from the yuan’s rally and the stronger currency does not offset the surge in commodities prices, he said.

The offshore yuan fell for the first time in four sessions on Monday, dropping 0.1 per cent to 6.3652 per dollar, while the onshore rate was little changed at 6.3696. The currency has gained more than 1.6 per cent in domestic and overseas markets in May to head for its biggest monthly advance since November.

The PBOC will properly guide expectations on the yuan, and the exchange rate will continue to be decided by market supply and demand, as well as changes in global financial markets, Dr Sheng was cited as saying.

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