China may get more than it seeks as yuan appeal rises
The yuan is rising in popularity among global central banks, which dovetails with China’s plan to expand its influence. Yet with the economy losing steam , a much stronger currency might not be in keeping with Beijing’s goals.
Nearly a third of respondents in a global survey of central banks intend to add CNY to their foreign currency reserves . That should increase appreciation pressures.
The yuan is at a five-year high versus its peers as neighbouring countries struggle with record-high COVID-19 cases , while China is effectively repressing the virus. So far, authorities have intervened verbally to slow the currency’s gains , while the daily USD/CNY benchmark has been close to forecasts, suggesting no added intervention.
However, curbing excessive yuan appreciation could be as important to Beijing as unleashing liquidity into the financial system . Officials expect trade growth to slow in the second half of 2021, despite blistering export data for June .
A popular narrative among CNY bulls is that yuan strength can mitigate the rising costs of imported raw materials, though officials have ruled this out . Anti-speculative measures in commodities appear to be their preferred approach .
If USD/CNY falls back below 6.4000, it could trigger a deluge of dollar-selling. Chinese FX authorities might work behind the scenes to ensure that doesn’t happen.
Source: Reuters (Reporting by Ewen Chew; Editing by Sonali Desai)