The yuan’s rally gathered pace on Thursday, with the Chinese currency climbing to its strongest level since March 2016 against a basket of trading partners.
The yuan rose 0.2% versus a group of 24 exchange rates to 98 points, surpassing its previous peak from 2018, according to data compiled by Bloomberg. Against the dollar, the Chinese currency was up 0.2% to 6.3779 at 5:24 p.m. local time.
It’s turning into a blockbuster year for the yuan as authorities grow comfortable with the currency’s strength, suggesting more appreciation is likely. The People’s Bank of China has been neutral in setting its daily reference rate this week, tracking moves in the market rather than using it to limit appreciation. The Securities Times newspaper said in a front-page commentary on Thursday the central bank has exited regular interventions in the exchange rate and is more tolerant about currency fluctuations.
While the gains are attracting inflows into the nation’s stock and bond markets, raising the risk of asset bubbles, a stronger yuan will dent the impact of higher imported commodity prices. Adding to optimism Thursday was the first official conversation between Beijing and the Biden administration’s trade chief.
“China at least so far isn’t very concerned with the rally, because it’s been trying to boost domestic demand to aid growth and dealing with higher global commodity prices,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB. “A strong yuan helps Beijing achieve these goals.”
China’s producer price index climbed by the most since 2017 in April, as factories absorbed soaring prices for imported raw materials like copper and iron ore. A stronger currency typically helps offset such inflationary pressures by making imports cheaper.
The yuan has risen this year against all but six of the 31 major currencies tracked by Bloomberg. The yen is almost 8% weaker versus China’s exchange rate, while South Korea’s won has fallen about 5% and the greenback has lost 2.3%.
China in January adjusted the weightings of currencies in the currency basket, reducing the influence of the greenback. The basket is one of a number of factors that helps set the yuan’s daily reference rate.
The appreciating yuan is pulling in foreign cash. The CSI 300 Index of stocks jumped more than 3% on Tuesday, the most since July, as overseas funds bought a net $3.4 billion worth of onshore stocks via exchange links with Hong Kong, the most ever. They purchased another $3.7 billion in the following two days.
To manage and counterbalance the inflows, China has steadily granted an additional quota for onshore funds to invest in securities overseas, in March boosting it to $135 billion—the highest ever. Other measures include encouraging mutual funds to invest in Hong Kong stocks, which led to record flows into the city in January. This month, China issued rules on the Wealth Management Connect, which would open a channel for eligible Greater Bay Area residents to invest offshore. A southbound bond connect is expected to start as soon as July.
Bullish calls on the yuan are growing. The yuan will rise to 6.2 per dollar this year due to China’s strong exports and lower dollar rates, according to Ming Ming, head of fixed-income research at Citic Securities Co., China’s biggest brokerage. The yuan hasn’t traded at that level since the PBOC devalued the currency in 2015.
Still, others caution that the PBOC is unlikely to allow gains to accelerate.
“The market is very optimistic about the yuan, as PBOC has done the minimum in slowing gains so far,” said Xia Le, chief Asia economist at BBVA Hong Kong. “But that doesn’t mean China will allow this rapid rally to run forever.”
Xia said he expects the PBOC to act to slow the pace of gains before the yuan climbs to 6.3 per dollar.
