Thu. Dec 9th, 2021

China’s yuan has strengthened to a near-three-year high, boosted by a falling dollar despite attempts by the central bank to keep the currency in check.

The yuan has been buoyed in recent months by the country’s rapid recovery from the coronavirus pandemic, and by a rush of international investment into China’s relatively high-yielding markets. The currency has also gained amid a broader bout of dollar weakness.

On Tuesday, the offshore yuan strengthened below 6.4 per dollar, as Chinese stocks jumped thanks partly to a surge in foreign buying.

Beijing would want to see slower yuan appreciation to support the economy, which is still fairly dependent on selling goods abroad, said

Alvin Tan,

head of Asia foreign-exchange strategy at RBC Capital Markets. While Chinese exports have surged since last year, a rallying yuan pressures exporters by making their goods more expensive when priced in dollars.

Mr. Tan said the People’s Bank of China had been “leaning against the strength” of the currency by setting weaker-than-expected reference rates for onshore yuan trading for the past month.

The central bank fixes a daily midpoint for the onshore yuan, and only allows trading up to 2 percentage points above or below this level. This is part of a so-called managed floating-exchange-rate system based on the yuan’s value against a basket of currencies.

The yuan is likely to stay between 6.4 and 6.5 to a dollar, while further appreciation could prompt stronger central bank action, said

Paul Sandhu,

head of multiasset quant solutions for Asia-Pacific at BNP Paribas Asset Management.

“The government is quite happy with the range it is sitting at. If it breaks 6.4 and stays there for some time, they may move in to do something,” Mr. Sandhu said.

On Tuesday in Hong Kong, the offshore yuan rallied about 0.2% to 6.3988 to the dollar, a level last hit in June 2018. The dollar weakened, with the

ICE

U.S. Dollar Index declining nearly 0.3% to 89.61, its lowest since early January.

China’s CSI 300 index, a gauge of the biggest shares listed in either Shanghai or Shenzhen, jumped 3.2%. Net foreign buying of mainland Chinese shares through Stock Connect, a trading link with Hong Kong, hit a record daily high of 21.7 billion yuan, or the equivalent of $3.4 billion.

Tuesday’s yuan strength was also likely due in part to the coming month-end, before which exporters normally sell earnings in foreign currency to buy yuan, said

Khoon Goh,

head of Asia research at

Australia and New Zealand Banking Group Ltd.

in Singapore.

China is testing a digital yuan, aiming to accelerate the replacement of cash and increase state control in a society where digital payments via Wechat Pay and Alipay are already the norm. Here’s what Beijing’s new system looks like—and how it would work. Photo credit: Florence Lo/Reuters

The central bank is eager to promote the idea that the currency won’t be volatile, but that it also won’t be a one-way bet for investors. On Sunday, a senior central-bank official said the yuan will remain “basically stable.” Liu Guoqiang, a deputy governor, said fluctuations in either direction will become the norm, with the exchange rate depending on supply and demand, and changes in global financial markets.

Mr. Liu also said the current exchange-rate system was suitable for China. A researcher at the central bank recently called for China to stop controlling the rate to promote greater international use of the yuan. Another suggested the yuan should be allowed to rally, to offset rising prices for imported commodities.

Write to Chong Koh Ping at [email protected]

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