The People’s Bank of China (PBOC) plays a crucial role in controlling the yuan’s exchange rate on the mainland. This involves setting a daily midpoint fix each morning, based on the yuan’s closing level the previous day and quotations taken from the inter-bank dealer. It is important to note that there are two versions of the yuan: the onshore yuan (CNY) and the offshore yuan (CNH). They differ mainly in trading restrictions, with the CNH not being as tightly controlled as the CNY, which is a result of China maintaining strict control of its mainland, onshore yuan.
The PBOC’s recent decision to set the yuan at 6.9101, following the previous close of 6.9288 and the estimate at 6.9102, can be seen as part of China’s efforts to maintain control of its currency. A tightly regulated currency like the yuan can help the Chinese government maintain stability and control over economic issues such as inflation, debt, and capital outflows. The exchange rate setting process helps to control the fluctuation of the currency in international markets and allows China to maintain its export-driven competitiveness.
One of the main reasons for China’s strict control over the yuan is to avoid rapid inflation or deflation. As the world’s second-largest economy, China relies heavily on exports, which provide a significant portion of its GDP. Devaluing the currency can boost exports by making Chinese products cheaper and more competitive in the international market. By maintaining a relatively weak currency, the Chinese government can help its domestic industries stay competitive while also keeping inflation in check.
Another reason for China’s currency control is to manage the levels of debt held by both the government and the private sector. A managed currency can help prevent sudden shocks to the economy that could impact the country’s ability to service its debt. Additionally, a steady currency can help attract foreign investment, which can assist with debt management and overall economic growth.
Furthermore, China has historically been concerned about capital outflows, with many individuals and companies looking to move money out of the country to protect against potential currency depreciation. By maintaining a stable exchange rate, the government can help minimize capital outflows and maintain confidence in its currency.
However, there are also downsides to a tightly controlled currency like the yuan. Strict control can lead to market distortions and limit flexibility for the Chinese economy. As the economy continues to grow and evolve, these rigid controls may become more challenging to maintain and could potentially hinder further economic development.
There have been recent efforts by the PBOC and the Chinese government to make the yuan more market-driven, such as adopting a more flexible approach to the daily fix, widening the trading band, and promoting the use of the offshore (CNH) market. However, significant control measures remain in place, and a truly free-floating yuan is likely still a long way off.
Moreover, China’s control over its currency has often been a point of contention with other countries, most notably the United States, which accuses China of being a currency manipulator to gain an unfair trade advantage. This issue has been part of the ongoing US-China trade war, with the US imposing tariffs on Chinese goods, and China retaliating with various measures of its own.
While there is no clear resolution to the trade war in sight, China’s continued control over its currency will likely remain a point of contention in international trade discussions. For the Chinese government, the stability and control offered by a tightly regulated currency like the yuan may outweigh the potential negative consequences associated with such a strategy.
In conclusion, China’s strict control over the yuan, evidenced by the PBOC’s setting of the daily midpoint fix, serves various economic and political purposes. It helps maintain stability and control for the Chinese economy, addressing concerns regarding inflation, debt, and capital outflows. However, it also comes with several downsides, such as market distortions, reduced economic flexibility, and increased international tensions. China’s approach to managing its currency will undoubtedly continue to have significant implications for its domestic economy and the future of international trade relations.
