FX.co ★ Yuan hits three-year high

The national currency of the People's Republic of China, despite the current economic and geopolitical difficulties, is again on the horse. According to analysts, the yuan managed to reach a record high in a short time.

On Wednesday, May 26, the People's Bank of China (PBOC) again strengthened the exchange rate of the national currency against the US to the highest in the last three years (by 184 basis points, to 6.4099 yuan per 1 US dollar). According to experts, the yuan holds the three-year record for the second day in a row.

A day earlier, on Tuesday, the Chinese currency, namely the offshore yuan (CNH), crossed the psychologically important barrier of 6.4000. This was largely due to the information about orders supporting USD, which were withdrawn. As a result, on Tuesday, May 25, the USD/CNH pair dropped 0.2% to 6.3972, but then caught up. According to Reuters, large state-owned banks in China, buying US dollars, sought to curb the explosive growth of the yuan. In this situation, the intervention of state banks was necessary to slow down the CNH rally, which is gaining momentum in the domestic market.

Experts believe that the reasons for the rise of the Chinese currency to a three-year high are the actions of the Fed, which does not react in any way to a temporary jump in inflation, as well as the active recovery of the PRC's economy after the COVID-19 pandemic. According to the Chinese media, citing competent sources, the further strengthening of the yuan is a matter of time. The strengthening of the Chinese currency is facilitated by such factors as a total weakening of the USD, an improvement in key economic indicators of the PRC and control over prices for basic commodities. China has provided a five-year plan (from 2021 to 2025) that provides a strategy to deal with abnormal price swings for commodities such as iron ore, copper, and corn.

According to analysts, instability in China's foreign trade could provoke another round of growth in the yuan against the dollar. In the short term, the CNH rate will tend to around 6.3000-6.2000 yuan per $1, experts say. In the long-term planning horizon, the bidirectional volatility of the Chinese currency will remain, experts summarize.

As a reminder, in January 2021, Sun Guofeng, head of the PBOC's Monetary Policy Department, said that bidirectional fluctuations in the yuan against the USD were normal. According to the official, similar dynamics of the USD/CNH pair will continue throughout this year. At the same time, the CNH exchange rate will depend on the state of the balance of payments of the PRC, the internal and external economic situation, as well as changes in the international foreign exchange market. The Chinese authorities intend to maintain the stability of the national currency "in a reasonable and balanced range," the POBC stressed.

According to experts, the current strengthening of the yuan is caused by the rapid economic recovery of the PRC after the pandemic, a prolonged weakening of the greenback and a powerful flow of foreign investment in the Chinese economy. However, many analysts are confident that the excessive strengthening of CNH will harm the Chinese economy, primarily the country's exporters.

Despite strong performance in the first quarter of 2021, indicating a steady growth in foreign trade, economists believe that the strengthening of the yuan is contrary to the interests of the national economy. Recall that the PRC's economy is largely dependent on exports, and the strong CNH contributes to the rise in prices for Chinese goods when recalculated in dollars.