The People’s Bank of China (PBOC) maintains strict control of the Yuan’s exchange rate on the mainland. This is due to several reasons, including the need to manage China’s economic growth, keeping its exports competitive, and its desire to minimize its debt. The onshore Yuan (CNY) has different trading restrictions from the offshore one (CNH), with the latter being less tightly controlled.
Each morning, the PBOC sets a daily midpoint fix based on the Yuan’s previous day’s closing level and quotations gotten from interbank dealers. In a recent trade, the PBOC set the Yuan at 6.8752, compared to the previous fix of 6.8987 and the previous close of 6.8740. Although both onshore and offshore Yuan rates are determined by market forces, the PBOC has the authority to intervene, and often does so when it believes the currency’s level is moving too far, too fast, or in the wrong direction. By tightly controlling the onshore Yuan’s level, the central bank can maintain stability in the nation’s financial system and domestic securities market.
The PBOC’s control of the Yuan’s exchange rate is critical for managing China’s economic growth. As the world’s second-largest economy, China’s monetary policy significantly impacts its domestic and international economic dynamics. A stable Yuan is essential for guiding China’s economy and supporting its growth targets. A weaker currency makes Chinese exports more competitive, helping the nation maintain its position as a major global exporter. However, it also increases the cost of imports, making imported goods more expensive for Chinese consumers and businesses.
By controlling the onshore Yuan’s exchange rate, the PBOC is also able to minimize its debt. China has experienced rapid credit growth in recent years, resulting in a high level of corporate and local government debt. A stable currency helps to alleviate the pressure on these debtors by reducing currency risk and ensuring that businesses can continue to service their debts. It also helps the central bank manage inflation, as a stable exchange rate reduces the cost of imported goods and services.
China’s exchange rate policy has attracted criticism from other countries, particularly the United States, which has accused China of manipulating its currency to gain an unfair advantage in international trade. In response to this criticism, the PBOC has taken steps to make its exchange rate policy more transparent and market-driven. This includes widening the trading band within which the Yuan is allowed to fluctuate and adopting a more flexible exchange rate regime.
The CNH, also referred to as the offshore Yuan, is traded outside of China and is not subject to the same restrictions as the CNY. As a result, the CNH can be more volatile and can deviate significantly from the CNY’s value. The offshore Yuan helps businesses with international transactions, as they can trade CNH without being subject to China’s currency controls. It also allows foreign investors to speculate on the CNY, as they can gain exposure to the onshore market through the CNH market. However, the PBOC can still influence the offshore Yuan through its open market operations and by setting the daily midpoint fix.
In conclusion, the PBOC’s control of the Yuan’s exchange rate is a crucial element of China’s monetary policy, and it plays a significant role in managing the country’s economic growth, international competitiveness, and debt management. Despite the drawbacks and criticism, the PBOC’s tight control over the onshore Yuan helps stabilize China’s financial system and support its overall economic development.