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China's stronger currency means difficult choices for Beijing - CNN

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That has left Beijing in a pickle. If the currency appreciates too quickly, the country's financial markets could be rattled by a rapid influx of capital, and the economy's fragile recovery could be thrown off track.
But government intervention to weaken the yuan could provoke Washington, which has long been suspicious of how much Beijing controls its currency. If China is trying to mend fences with the United States, renewed accusations that it is a currency manipulator aren't going to help.
The rising value of the yuan isn't a completely new development. The currency has jumped more than 10% over the past year. But lately it has picked up even more steam, recently climbing above 6.4 yuan per US dollar — a boost attributable in part to the country's economic recovery and a weaker dollar.
The appreciation of the yuan indicates that the People's Bank of China (PBOC) has been willing to tolerate a stronger currency, according to Chaoping Zhu, global market strategist at JP Morgan Asset Management. He added in a research note this week that the central bank — which allows the currency to trade every day within a narrow band — may be trying to counter the escalating costs of commodities like steel and other building materials, which are necessary for China's ambitious infrastructure plans.

Too much, too fast

As with other aspects of China's economic and financial systems, Beijing is wary of too much happening too quickly.
If the yuan is too strong, the country's exports could become less competitive and threaten the economic recovery. Robust export growth has helped the country continue to grow this year, and that sector is a major source of employment in China.
Financial stability is also a concern. If too much unwanted money flows into the country, that could fuel local asset bubbles and cause inflation.
"Our country must prevent a large influx of speculative money, which could ... cause a disturbance to the financial market and pose problems to our independent monetary policy," Sheng Songcheng, a top government adviser and former PBOC official, told the state-run Xinhua News Agency in a recent interview.
To temper the rally, Beijing announced this week that it would raise the reserve requirement ratio for foreign exchange holdings by 2 percentage points to 7%, the first hike in 14 years.
The increase will force banks to hold more foreign exchange assets in reserve, thus tightening the supply of foreign currency on the market and putting downward pressure on the yuan.
It's a rare move for the central bank, which claims it has avoided direct intervention in the currency market since 2017, when it pledged to open up the flow of capital into and out of China, and allow for a more flexible exchange rate.
It also signals that authorities may be willing to introduce more measures if necessary. Liu Guoqiang, deputy governor of the PBOC, said last week that the central bank will "firmly crack down" on currency speculation.
And the government's State Council stressed at a recent executive meeting that it's necessary for the government to "maintain the stability of monetary policy and keep the yuan basically stable," while helping small and medium-sized businesses cope with production and operation difficulties.

US-China tensions

Whatever Beijing does, it has to be careful.
Washington has long been wary of efforts by Beijing to control the value of the yuan. In 2019, the Trump administration designated China a "currency manipulator," after the country's central bank allowed its currency to weaken amid the ongoing trade dispute. (China has denied that it rigs its currency.)
The threat of escalating US-China tensions hasn't gone away. Tariffs still remain on many Chinese exports more than a year after the two countries reached a "phase one" trade deal. And under President Joe Biden, the United States and China have feuded over alleged human rights abuses in Xinjiang and the origins of Covid-19.
The Chinese central bank has so far refrained from using more effective measures to curb the yuan's rise, according to Ken Cheung, chief Asian FX strategist for Mizuho Bank.
The banking authority could, for example, use a murky tool it introduced in 2017 that factors into its daily fixing of the yuan's value. The PBOC has never disclosed how exactly the tool works, and suspended its use last October. But markets have widely interpreted the tool as a way for the central bank to counter market forces that pull the yuan.
Using that tool, though, "could cause backlash for the US side and disrupt the trade talks," Cheung wrote in a research report this week.
Should the central bank refrain from taking a more active role in curbing the yuan's value, Cheung suspected the currency will likely continue to be driven by the US dollar. The greenback has weakened over the past few months, weighed by a dovish Federal Reserve and rising inflation fears. Friday's US jobs report could continue to affect the dollar's strength, as traders wait for more clues on the state of the country's economic recovery.
Analysts at Goldman Sachs have suggested the yuan is likely to remain strong for a while, even if that makes Beijing uncomfortable. That's in part because they expect foreign capital to continue coming into China, and for the US dollar to keep weakening.

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