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Why China is reining in the renminbi

June 1, 2021, 12:08 PM UTC

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On Monday, China’s central bank yanked a policy lever it hasn’t touched since the global financial crisis, signaling Beijing’s determination to rein in a currency rally that has seen the renminbi surge to its strongest level against the dollar in three years.

The People’s Bank of China decreed that starting June 15 the nation’s financial institutions must hold 7% of their foreign exchange in reserve. That’s an increase from the current reserve rate of 5%. It was China’s biggest-ever reserve rate hike and its first since 2007.

The move was mostly symbolic. The measure will make it slightly more expensive for China’s financial institutions to hold foreign currencies. Becky Liu, China macro strategist for Standard Chartered, per the Financial Times, estimates the move will suck about $20 billion worth of liquidity out of China’s foreign exchange market.

Even so, the order sent a clear message to banks and currency traders that further appreciation of the renminbi won’t be, well, appreciated. As CommerzBank AG economist Zhou Hao noted to Bloomberg, China’s central bank has all manner of additional weapons to combat a renminbi rally and is serving notice to speculators that if they try to push the currency much higher, “the market will fail.”

That would be putting an end to what, for the last year, has been a very profitable bet. In the last twelve months, the renminbi, also known as the yuan, has gained 12% versus the dollar. At the end of the day Tuesday, the Chinese currency was trading at around 6.37 to the dollar, its strongest level since May 2018. Against a reference basket of currencies of China’s trading partners, the renminbi is its strongest since April 2016.

The reasons for the renminbi’s surge against the greenback are straightforward. China bounced back from the shock of the COVID-19 pandemic more rapidly than any other major global economy. In the first quarter of 2021, Chinese GDP grew by a staggering 18.3% over the same period the previous year and is expected expand by 8% or better for the full year. The renminbi’s rally also has been driven by global investors’ enduring enthusiasm for pumping money into China—pandemic and escalating political tensions between Beijing and Washington notwithstanding.

But Beijing’s willingness to tolerate a stronger yuan has been harder to parse. A strong yuan puts pressure on Chinese exporters. For years, a favorite refrain of American China hawks from both political parties was that Beijing kept the renminbi artificially weak to create an unfair advantage for Chinese exporters. In 2019, the Trump administration branded China a “currency manipulator” after the reminbi weakened below the level of 7 to the dollar.

But over the past year, as the renminbi gained and the dollar weakened, the currency manipulator label has come to seem increasingly absurd. Among analysts and economists, the debate shifted to whether China’s leaders have learned to live with a stronger currency—and might even be contemplating allowing the yuan to trade freely.

One argument offered to explain China’s new currency confidence: the stronger yuan matches President Xi Jinping’s push to rebalance China’s economy by stoking domestic consumption and lessening the nation’s dependence on exports. (And, in any case, Chinese exports have boomed this past year despite the renminbi’s rise.)

Some noted that a strong currency makes it cheaper for China to import commodities and chips. Others speculated that perhaps China’s policy makers had refrained from intervening in currency markets because they feared positive economic conditions underlying the renminbi’s run-up are only temporary. Many suggested that the yuan’s rise provided the perfect opportunity for China to transform it into a global reserve currency to rival the dollar.

There are signs of debate within the PBOC itself. At an April 16 financial forum, Zhou Chengjun, head of the PBOC’s Finance Research Institute, argued that if the yuan is to become a global currency, it must be allowed to trade freely. “We need to admit that under the condition of yuan internationalization, we won’t be able to control the exchange rate, and China’s central bank has to let go of exchange-rate goals in the end,” Zhou said, according to a transcript.

In an April 18 speech to the China’s Boao Forum for Asia, PBOC deputy governor Li Bo seemed to reject the notion that China intends the renminbi to become a global reserve currency. “Our goal is not to replace the U.S. dollar or any other international currency, our goal is to allow the market to choose and to facilitate international trade and investment.”

And on Sunday, another deputy governor, Liu Guoqiang, dismissed market speculation about liberalizing the yuan. In a brief statement on the PBOC’s website, Liu declared that China’s existing managed floating exchange rate system is “an institutional arrangement fit for China at present and the foreseeable future.”

For now, the idea of completely liberalizing their currency is one to which China’s leaders remain unconverted.

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Nicholas Gordon. Reach him at nicholas.gordon@fortune.com

Eastworld news

Reversing the one-child policy

After its recent census showed the slowest population growth in decades, Beijing will soon allow all couples to have three children. The Chinese government is concerned that a decreasing and aging population will halt its economic growth engine and put pressure on its social services. However, it is unclear whether the changed restrictions will reverse the country's demographic transition: an earlier policy change to allow some couples to have two children had little effect on fertility rates. Fortune

Vaccine jackpot

Despite facing low vaccination rates and expiring doses, Hong Kong’s government has been slow to offer incentives to encourage vaccinations. The city’s private sector has stepped up instead, offering free goods and services, expanded leave policies and, most surprisingly, a lottery with a $1.4 million, 450 square-foot one-bedroom apartment as the jackpot. It may have worked: vaccination bookings were up over the weekend. South China Morning Post

Malaysian lockdown

Malaysia starts a two-week nationwide lockdown today, following a surge in COVID cases and lockdowns targeted on specific regions. Malaysia’s COVID spike is now worse than India’s on a per capita basis. Analysts predict the lockdown may shave two percentage points off the country’s economic growth, even as Malaysia prepares a $9.7 billion stimulus package and exempts large parts of the country’s manufacturing sector from the new restrictions. Reuters

Wolf Warriors

In his latest column, Gideon Rachman details how China’s more aggressive diplomats are undercutting Beijing’s attempts to reframe itself after the COVID pandemic. From trade spats with Australia to rude social media posts about India’s COVID surge, Rachman’s column argues that the drive to understand COVID’s origins is encouraging this diplomatic defensiveness, which in turn reinforces suspicion of China overseas. Financial Times

Worker safety

Fashion brands and garment worker unions agreed to a three-month extension on negotiations on new safety standards. The landmark Accord on Fire and Building Safety, signed after the deadly collapse of the Rana Plaza garment factory, is set to expire this year. Responsibility for safety monitoring is meant to be handed over to a single Bangladeshi organization, yet unions and activists are concerned whether this new body’s powers are robust enough to force change. The New York Times

Another writer leaves China

Author and writer Peter Hessler announced that he would be leaving China after Sichuan University chose not to renew his contract. Hessler is known for his writing on China, including a recent piece in The New Yorker about the country’s response to the coronavirus pandemic. Hessler first moved to China as a Peace Corps volunteer, writing several acclaimed books before leaving in 2007. He returned to China in 2019 to work for Sichuan University. South China Morning Post

 

Markets and movers

Monde Nissin — The Philippines’ largest instant noodle manufacturer raised $1 billion on the Philippine Stock Exchange in the country’s largest ever listing, though shares were flat in first-day trading. Monde Nissin dominates the country’s snack scene, but it is also making a play in the alternative meat space with its purchase of the Quorn brand in 2015.

Kathy Matsui — The former Goldman Sachs vice chair is starting a venture fund that will focus on helping startups with environmental, social and governance values. The new fund, named MPower Partners Fund, includes Dai-ichi Life Insurance and Sumitomo Mitsui Trust Group as investors. Matsui is best known for her work on 'Womenomics': a series of reports that suggested empowering women as a solution to Japan’s shrinking labor force. The term was adopted by former Prime Minister Shinzo Abe, though efforts to increase women participation fell short of its goals.

PropertyGuru — The Singapore-based property portal will acquire platforms in Malaysia and Thailand, purchasing stakes owned by Australia’s REA Group. This is the latest in a trend of major tech deals in Southeast Asia, most recently the merger between Gojek and Tokopedia, as startups seek to achieve market scale by acquiring potential competitors.

Meituan — Meituan’s shares jumped 10% after financial results were better than expected, with first-quarter revenues doubling from the same period a year ago. Meituan’s shares tumbled earlier this year after Chinese regulators announced an investigation on antitrust concerns; On Friday, CEO Wang Xing pledged to work with regulators, provide insurance to delivery drivers and cut fees for partner restaurants.

Korea exports — South Korea’s exports increased by 45.6% year-on-year: the fastest increase since 1988. The surge comes after exports plunged in 2020 due to the COVID pandemic. Exports were driven by increased chip and car shipments.

Final figure

1/5

On average, the value of newly-listed shares in Hong Kong have dropped by a fifth since their debut in the worst performance among major exchanges. Two-thirds of Hong Kong's new listings are now trading below their issue price, with analysts pointing to inflation fears, investor fatigue and lofty valuations. One outlier: JD Logistics, whose shares surged by 18% in first-day trading in the city's second-largest IPO of the year, and the third listing from the JD empire.

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