Why is China no longer trying to slow down the growth of the yuan exchange rate?


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The yuan has been consolidated against the dollar and has reached a record rate since 2018. This strengthening was driven by China’s good economic performance. Demand for its products in other countries is constantly growing and a strong currency is no longer an obstacle for domestic exporters.

On November 18 is the exchange rate of the yuan reached its lowest level in more than two years. The Chinese currency was trading at 6.5427 yuan per dollar, up from 7.1697 in May 2020. This represents a consolidation of more than 8% against the US currency.

Previously, the Chinese authorities had tried to keep the yuan at a stable level and avoid its drastic strengthening, as this always made China’s exports of goods to other countries more expensive. In fact, exports have been responsible for making up an important part of China’s GDP for many years.

China is increasing its exports

Despite the current strengthening of the Chinese currency, the Asian country’s central bank has refrained from using any tool at its disposal to stop it. While this seems to run counter to the competitiveness of Chinese products, Chinese exports were not affected by the positive momentum of the yuan. In October 2020 up 11.4%, with the highest rate in 19 months.

This is because the demand for Chinese products in the world does not stop growing. Other countries bought their personal protective equipment, microelectronics and computers from China, which became much needed in the massive transition to telecommuting.

Today, many Western countries are facing a second wave of contagion, resulting in unpopular production constraints once again. Meanwhile, thanks to tough restrictions at the start of the pandemic, China is now the only great industrial strength that continues to function normally and is not subject to closures. As a result, Chinese goods are filling the void created by declining production in other states.

While earlier the head of the Asian country’s central bank, Yi Gang, assured Beijing the flexibility of your currency, the professor of the Institute of Economics of the People’s University of China, Huang Weipin, Sputnik said the yuan will not have a flexible exchange rate for the time being. However, the nation has followed a course to allow market mechanisms to determine the exchange rate of its currency.

China has repeatedly insisted that it try to make the yuan exchange rate more market-oriented than before. Of course, fluctuations in bonds are controlled. And now the yuan is being contained. The future will depend on how the epidemiological situation unfolds. in the world. If the US economy continues to decline, the yuan will strengthen accordingly, “the professor said.

According to the Chinese academic, this allows us to say that China is in “most cases” based on the trends of the market.

What is happening in the country?

China is refraining from curbing the yuan exchange rate for a number of reasons.

One of these is a stronger national currency helps attract investors foreigners in Chinese markets. In the third quarter of 2020, they held Chinese bonds worth $ 66.89 billion. Now they are attracted by a higher return on investment in their debt market that exceeds that of other countries.

It’s also no secret that a stronger yuan benefits importers because it makes the goods they buy from other countries cheaper and boosts their consumption in China, which in turn becomes a powerful engine of economic growth.

Today the Asian country imports a significant part of the intermediates used in the production of finished products. So a stronger yuan will help maintain the competitiveness of domestic manufacturers, Huang Weipin noted.

“It is well known that chips and crude oil make up a significant portion of China’s imports. These goods and raw materials are very important to the industry. Therefore, their imports largely determine the functioning of the entire economy.” emphasizes.

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