US-China economic talks put spotlight on yuan exchange rate as currency continues to surge

The yuan hit a three-year high against the US dollar and a five-year high against a trade-weighted basket of currencies this week

The strength of the yuan is likely to renew attention on how China manages its exchange rate amid US negotiations, analysts say

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China’s yuan hit a three-year high against the US dollar and a five-year high against a trade-weighted basket of currencies this week. Photo: Reuters

Published: 8:15am, 3 Jun 2021Updated: 9:57am, 3 Jun 2021

The rapid appreciation of the yuan against the US dollar recently is likely to draw increased scrutiny from the Biden administration of China’s opaque exchange rate mechanism, as high-level trade talks resume between the world’s two biggest economies, analysts say.

China’s top trade negotiator Liu He held a virtual meeting with US Treasury Secretary Janet Yellen on Wednesday morning, just days after he had a conversation with US Trade Representative Katherine Tai that represented the first bilateral trade talks under the presidency of Joe Biden.

China promised to refrain from manipulating the yuan’s exchange rate for competitive advantage as part of the phase one trade deal signed with the US last year.

But Washington is concerned Chinese state-owned banks might be acting as proxies for the People’s Bank of China (PBOC) to intervene in the market, said ANZ Bank’s head of Asia research Khoon Goh.

A US Treasury report on exchange rates published at the end of last year highlighted that China provides limited transparency on key features of its exchange rate mechanism, including the relationship between the PBOC, the foreign exchange activities of state-owned banks, and the central bank’s activities in the yuan market outside China.

“There could very well be good commercial reasons why Chinese state-owned banks are increasing their foreign asset purchases,” Goh said. “[But] the US Treasury suspects that some of that might be de facto intervention.”

In the past, Beijing relied heavily on foreign exchange intervention to control the yuan’s value. The PBOC would purchase US dollars in the interbank market from Chinese banks, turning them into central bank reserves that became known as the world’s largest war chest. In exchange, the PBOC would sell yuan to the banks, who would sell it on to customers, suppressing the yuan’s appreciation.

Since 2017, the PBOC has claimed not to have engaged in currency intervention because it is focused on opening up the nation’s capital account to allow more funds into and out of China. This requires making the yuan’s value more market driven, rather than determined by the government, and China’s reserve assets have stayed stable between US$3 trillion and US$3.2 trillion since then.