Chinese yuan continues to appreciate against the dollar, as US Federal Reserve is set to raise rates
Published: Feb 21, 2022 05:52 PM
File Photo: A worker counts Chinese currency renminbi banknotes at a bank in Tancheng County of Linyi City, east China's Shandong Province, April 11, 2013. Photo:Xinhua

File Photo: A worker counts Chinese currency renminbi banknotes at a bank in Tancheng County of Linyi City, east China's Shandong Province, April 11, 2013. Photo:Xinhua

The Chinese yuan continued to strengthen against the US greenback as the former is drawing attention as a safe haven asset by global traders who are rattled by possible multiple rates hikes by the Federal Reserve to curb rapidly surging inflation in the US.

The exchange rate between the Chinese currency against US dollar hit 6.32 during Monday's trading sessions, hitting a record high for the yuan in nearly four years.

The central parity rate of yuan was set 58 basis points lower at 6.3401 yuan against one US dollar on Monday, according to the China Foreign Exchange Trade System.

Within China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

From the second half of last year, China's foreign exchange market has experienced a trend of stronger yuan under the expectation of the Fed's raising interest rates to contain inflation. 

"With rate hike signal becoming clearer and nearer, it indicated higher volatility for global financial markets in 2022. Global traders, acting like birds startled by the mere twang of a bow-string, are looking for safe haven assets," Cao Yuanzheng, chairman of BOC International Research, told the Global Times on Monday.

The yuan's gain in value is also boosted by a steady inflow of foreign capital to China, which will further strengthen the currency's appreciation, according to a research note by the foreign exchange team of CICC Research.

A strong yuan is backed by a robust Chinese economy supported by the country's effective measures to contain the coronavirus, Cao noted. And the currency has helped shield Asia's emerging markets from capital exodus, typically seen when developed market interest rates rise.

With China's exports and imports topping $6 trillion for the first time in 2021, a record high, the use of yuan in trade settlement has also increased. 

Payments using the yuan now make up a record 3.2 percent of market share, according to latest data from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), which has proved the yuan's attractiveness to traders.  

The influx of foreign capital into the Chinese market is inseparable from the country's continuous efforts in deepening reforms and widening opening up especially in the financial sector, experts said.

In the coming week, the global market will continue to pay attention to the standoff between Russia and Ukraine. As long as there is no critical improvement or deterioration in the situation, the foreign exchange market will likely become less volatile, according to the CICC research team.

Since the yuan's recent appreciation is caused by multiple short-term factors, it is hard to predict its trend over the long term, and future depreciation possibility cannot be ruled out, given the monetary policy divergence between China and the US, the evolution of the pandemic as well the outlook of China's exports in 2022, Cao noted.

While the US central bank is almost certain to raise rates, the People's Bank of China (PBC), China's central bank, is expected to pursue targeted policy easing to bolster GDP growth. 

The PBC will use a comprehensive package of monetary policy tools to market liquidity being kept at a reasonably ample level, and ensure that the growth of broad money supply and social financing matches nominal economic growth, according to PBC Governor Yi Gang.

Global Times