Wednesday , November 25 2020

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


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The yuan has consolidated against the dollar, reaching a record exchange rate since 2018. This strengthening was the result of 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.

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

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

China is increasing its exports

Despite the current strengthening of the Chinese currency, the Asian country’s central bank has refrained from using any instrument at its disposal to stop it. Although this appears to run counter to the competitiveness of Chinese products, Chinese exports have not been affected by the positive dynamics of the yuan. In October 2020. increased by 11.4%, reaching its 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 has become indispensable in the mass transition to remote use.

Today, much of Western countries face a second wave of contagion, which in turn re-imposes unpopular restrictions that affect production. Meanwhile, thanks to severe restrictions in the early stages of the pandemic, China is now just a great industrial power which continues to function normally and is not subject to closure. As a result, Chinese goods are filling the gap created by declining production in other countries.

Although previously the head of the central bank of the Asian country Yi Gang assured that Beijing would increase that share flexibility of your currency, Professor of the Institute of Economics of the People’s University of China, Huang Weipin, informed Sputnik that for now the yuan will not have a flexible exchange rate. However, the state has embarked on a path to allow market mechanisms to determine the exchange rate of its currency.

“China has repeatedly insisted on trying to make the yuan’s exchange rate more market-oriented than before. Of course, fluctuations are controlled in volumes. And now the yuan is kept within limits. The future will all depend on the epidemiological situation in the world. falling, the yuan will continue to strengthen accordingly, ”says the professor.

This, according to the Chinese academic, makes it possible to claim that China is in “most cases” based on market trends.

What is happening in the country?

China has refrained from restricting the yuan’s exchange rate for several reasons.

One of them 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. They are now attracted by a higher return on investment in their debt market which exceeds that in other countries.

It is also no secret that the yuan is stronger benefits importers because it makes goods purchased from other countries cheaper and increases their consumption within China, which in turn becomes a powerful engine of economic growth.

Today an Asian country imports a significant portion of raw materials used in the manufacture of finished products. Therefore, a stronger yuan helps maintain the competitiveness of domestic producers, Huang Weipin noted.

“Chips and crude oil are known to make up a significant part of Chinese imports. These goods and raw materials are very important to the industry. Therefore, their imports greatly determine the functioning of the entire economy.” emphasizes.

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