On Wednesday, the People’s Bank of China (PBOC) set the yuan at 6.8715 as compared to its last close of 6.8788. This comes amidst China’s strict control over the yuan’s rate on the mainland. It is important to note that the onshore and offshore yuan differ in trading restrictions. The offshore yuan (CNH) is not as tightly controlled as the onshore one (CNY).
The PBOC sets a daily midpoint fix based on the previous day’s closing level of the yuan and quotations received from the inter-bank dealer. This midpoint fix is used as a reference rate for banks, businesses, and other financial institutions when dealing with the yuan throughout the day.
The yuan’s value is crucial in determining China’s economic well-being. A weaker yuan enhances China’s competitive exports to other countries, while a stronger yuan encourages imports and benefits foreign investors.
There are several factors that influence the yuan’s value, including supply and demand forces, political and economic stability, and the central bank’s policies. However, in recent years, the U.S.-China trade tensions have been a significant driver affecting the yuan’s value.
The trade tensions were sparked in 2018 when the U.S. implemented tariffs on Chinese imports, alleging China’s unfair trade practices, intellectual property theft, and forced technology transfer. This triggered an ongoing economic war between the two nations, resulting in tit-for-tat tariffs and counter-tariffs that have destabilized the global economy.
The trade dispute between the two nations has also taken a toll on the yuan’s value. The yuan has depreciated by nearly 15% against the dollar since the trade war began, as investors were concerned about potential capital outflows, slower growth, and weaker exports.
For China, maintaining the yuan’s stability is critical to ensure economic growth and stability. The government has taken several measures, including reducing interest rates, tax cuts, and fiscal stimulus to support the economy amidst challenging market conditions.
In 2019, PBOC Governor Yi Gang reiterated China’s commitment to maintaining the yuan’s stability and keeping it within a reasonable and balanced range. He stated that the government will continue to implement market-oriented reforms, promote internationalization of the yuan, and enhance the yuan’s role in the global financial system.
China’s efforts have paid off, as the yuan has shown signs of recovery in recent months. The yuan has appreciated by nearly 4% against the dollar since September 2020, as China’s economy rebounded from the pandemic-induced slowdown, and global investors flocked to China’s financial markets.
China’s focus on internationalization of the yuan is also evident in its efforts to promote the use of the yuan in trade and investment. The Belt and Road Initiative (BRI) is a key example of China’s push to internationalize the yuan.
The BRI is a massive infrastructure and trade project that aims to revive the ancient Silk Road trading routes connecting Asia, Europe, and Africa. China has pledged to invest over $1 trillion in the initiative, with most of the funding provided in yuan. This allows China to establish the yuan as a global reserve currency and challenge the dominance of the U.S. dollar.
However, there are risks associated with this strategy. The yuan’s internationalization may result in China losing control over its currency, as external market forces may influence the yuan’s value. It could also lead to increased scrutiny from the international community over China’s economic policies and practices.
In conclusion, the PBOC’s recent setting of the yuan’s value at 6.8715 highlights China’s efforts to maintain the yuan’s stability amidst challenging market conditions. China’s commitment to market-oriented reforms, internationalization of the yuan, and enhancing the yuan’s role in the global financial system will be critical in ensuring the yuan’s long-term stability and growth. However, risks remain, and China must tread carefully in its pursuit of yuan internationalization.
