Will the Yuan continue to rise against the dollar?

Rising Yuan vs. the Dollar

The renminbi has been on the rise since the end of May, especially in recent days. When the Yuan is said to rise or fall in China, it is often against the US dollar. Indeed, the US currency was worth more than 7.15 yuan at the end of May. It is currently trading at 6.82/6.83 after breaking 6.9 on August 25. This Chinese progression is instead a fall of the dollar :

USD renminbi 美金 人民币

The US currency is also falling against other currencies. The euro fell from 1.07 at the end of March to 1.19 today. Forecasters and hedge funds didn’t even see it coming.

Yuan Down against the Euro

On the other hand, against other currencies, especially the euro, the Yuan did not rise; it lost ground :

What do economists think? Columnist Wang Jian takes stock.

What is causing this rise of the Yuan against the dollar?

1. The fall of the dollar.
2. The interest rate differential (利差), 250 points, between the two countries.
3.The policy of Federal Reserve (FED): it has sharply lowered its base rates, it has clearly stated that they will remain low, even if inflation exceeds the target of 2%.
4. The FED wants a low dollar to stimulate the economy. According to journalist Wang Jian, the Chinese central bank is not intervening and is getting used to the situation.

Appreciation of the dollar in the medium term?

Goldman Sachs thinks that the Yuan will continue to rise over the next 12 months, that its level is very dependent on the trade war. Negotiations on trade agreements are not interrupted; it is a factor of rising. On the other hand, according to other financial analysts, a worsening of Western countries’ epidemic could change the situation.

For the Beijing economist Gao Shenwan, the cycle of the renminbi’s decline over the last five years is over, beginning its long-term rise. The world market share of Chinese exports has been steadily increasing until 2015. From 2005 to 2015, the renminbi was overvalued. On August 8, 2015, China lowered the reference rate by 2% against the dollar, which was equivalent to a devaluation.
In 2019, the market share increased over 2018 because, according to Gao, the Yuan was undervalued. The current and future increases have several causes: Sino-US trade agreements, an easing of credit conditions, and an undervaluation of the Yuan.

Exporting is doing better

Wang Jian adds that the improvement in exports should also be mentioned. The sector is doing better for several reasons. The factories resumed early enough despite the epidemic, from March-April. Difficulties caused some companies to go out of business, but on the bright side, the best ones have stayed and have regained some market share, and are even making better profits. The global demand for medical equipment is robust, and China is well placed in this field.

Risks

According to the journalist, the risks lie in the turn of the Sino-American relations and the situation in Hong Kong. Another crucial point is the ability of the authorities to avoid capital flight. The measures for currency outflows are already strict, but there are still many countermeasures to be taken.

So the consensus is for the Yuan to rise – but the consensus is not always right! The Chinese Central Bank could live with this, provided it is gradual. The trend is not expected to change until the US elections. And after that?

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5 September 2020

Posted on Categories Finance

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