© Reuters. FILE PHOTO: Chinese Yuan banknotes are seen in this illustration taken February 10, 2020. REUTERS/Dado Ruvic/Illustration//File Photo
By Kevin Yao
BEIJING (Reuters) – China is likely to lean on incremental steps to slow the yuan’s gains to deter speculators and help its exporters, shunning drastic measures that could undermine its goal to liberalise the currency and boost the yuan’s global clout, policy sources said.
The yuan has gained almost 12% against the dollar since May 2020 as China leads other economies in its recovery from COVID-19 and the greenback weakens, though it has been driven more recently by foreign fund inflows into yuan-denominated bonds and stocks.
But it slipped more than 0.5% this week as Beijing has mounted a coordinated effort to talk down expectations of further gains. A flurry of official statements have warned against speculating on the currency and regulators have taken steps to stem its rise.[CNY/]
The People’s Bank of China (PBOC) has ample tools to cool one-way currency bets and fend off hot money inflows amid worries over asset bubbles, but will tread cautiously to avoid spooking investors, said the policy sources, who advise the government.
The PBOC, under reform-minded governor Yi Gang, has been trying to give market forces a greater role in steering the yuan, part of longer-term reforms to make it a more international currency, they said.
“The yuan’s appreciation will test the PBOC’s market-based approach, but policy tools at the PBOC’s hands will be enough to cope with it,” said one of the people, who declined to be identified due to the sensitivity of the matter.
In a statement responding to questions from Reuters, the PBOC said it will not “use the exchange rate as a tool”, and reiterated its managed floating currency regime based on market supply and demand and with reference to a basket of currencies.
“The attitude of the PBOC on the exchange rate goal is consistent and clear, that is, no one can accurately predict the trend of the exchange rate, the uncertainty of the exchange rate is inevitable, and two-way fluctuations are normal,” it said.
Policymakers fear rapid yuan gains could lure more speculative money into everything from property, to stocks and commodities, fuelling asset bubbles, with any sudden reversal of the inflows potentially harming the economy.
They also worry about the impact on Chinese exports, which remain strong for now but could lose steam in the second half of the year as factories in other countries recover from the pandemic.
“We cannot allow one-way yuan appreciation. Otherwise there will be a vicious cycle as more capital inflows drive appreciation, and more appreciation boosts inflows,” Xu Hongcai, deputy director of the economic policy commission at the China Association of Policy Science, told Reuters this week.
“Eventually, this could lead to domestic inflation and asset bubbles and affect domestic monetary policy. Too much appreciation will be…