Sources in Beijing are eager to present upside pressure on the Chinese Renminbi, even as the US Dollar has also strengthened, as a reflection of powerful and positive trade flows, rebounding investor sentiment, and a long-term movement of trade settlement denominations into the RMB.
But there is a limit to the government’s tolerance for an appreciating currency as the economy recovers from a sharp Q3 2021 slowdown, and officials now warn that they will intervene “if the RMB begins to hurt exports or pose a risk to financial stability.”
The message from these sources is as follows:
Recently, the RMB exchange rate and the US dollar have shown a “double-strong” pattern. In the context of the rising DXY [Dollar] Index, the RMB exchange rate did not depreciate at the same time, but instead appreciated, which directly pushed the three major RMB exchange rate indices to a greater upward trend.
The CFETS RMB Index, which tracks the yuan against 24 currencies, [has] gained about 6% so far this year to [hit] 100.82 on November 26, near the record high of 100.84 reached on January 22, 2016.
There are three factors behind the RMB strength: China’s exports remain strong, foreign trade enterprises’ foreign exchange demand pushed up the RMB exchange rate, and market sentiment…
China’s trade growth has remained well above pre-pandemic levels all year. Exports through October surpassed [exports for] all of 2020, and this was the 13th straight month of double-digit growth. More meaningfully, more and more foreign trade enterprises have increased the proportion of RMB settlement when signing foreign trade contracts for next year.
The RMB’s recent rally is unlikely to alter the trend of its two-way movements. [But] based on the current situation in the spot foreign exchange market, the central bank issued a notice last week. The notice strongly urged financial institutions to step up their exchange-rate risk management, restrict speculative foreign exchange trading, and to not bet on unilateral appreciation of the RMB.
Although we are becoming more and more tolerant of RMB volatility, we will certainly intervene if the rapid appreciation of the RMB begins to hurt exports or pose a risk to financial stability.