Yuan's rapid rise is 'not sustainable'

The rapid appreciation of China's yuan against the US dollar may have overshot and will not be sustainable, a former central bank official said in an interview with state media Xinhua News yesterday.

The yuan has gained 1.7 percent so far in May to trade at three-year highs. It breached the psychologically important 6.4 per dollar level last week, but the pace of its rally has slowed after regulators signaled concerns over strong one-way bets on the currency. The People's Bank of China on Friday set the midpoint rate of the yuan at 6.3858 per US dollar, the strongest since May 2018.

While China's economy has rebounded quickly from a pandemic-induced slump early last year, the yuan's gains have been largely chalked up to sustained weakness in the dollar.

Investors had increased their bets on further strength in the Chinese unit after the PBOC appeared not to show discomfort with recent gains. But big state-owned banks were seen buying US dollars early last week in a move seen as an effort to temper fast yuan gains.

Sheng Songcheng, former director of the surveys and statistics department at PBOC, said the overshot of the yuan signals short-term speculation and is unsustainable.

"We will prevent short-term money flooding from pushing up the yuan and diminishing the competitiveness of export firms," said Sheng.

Chinese regulators had vowed to crack down on manipulation of the forex market and said the yuan exchange rate cannot be used as a tool to stimulate exports nor to offset the impact of surging commodity prices.

Prices of key commodities including steel products and copper had surged more than 30 percent since the start of the year, denting corporate profits throughout the supply chain.

Surging raw materials costs have also raised worries about inflationary pressures and their potential impact on monetary policy.

"The appreciation of the yuan will squeeze margins at export firms, in particular the medium- and small-sized ones," said Sheng, adding the rapid appreciation will also damage the broader economy as companies would be distracted from their main business and turn to speculation.

The PBOC-backed Financial News also warned yesterday of the potential factors that would lead to a depreciation of the yuan against the dollar, including policy changes by the US Federal Reserve, a strong revival of the US economy, control of the Covid-19 pandemic and bursting of US asset bubbles.