Beijing unlikely to permit rapid yuan appreciation, economists say
The People’s Bank of China reported Monday that foreign-exchange reserves climbed $19.55 billion in August to $3.438 trillion, exceeding the $3.425 trillion economists surveyed by The Wall Street Journal had forecast. The monthly buildup came against a weaker dollar and a surging Chinese trade surplus, renewing concerns about the yuan’s appreciation.
The data came as policymakers worldwide weighed actions against inexpensive Chinese exports they say benefit from unfair government subsidies. Concerns about domestic deindustrialization have prompted some countries to consider extra trade barriers and to press Beijing to allow the yuan to appreciate. The currency is widely considered undervalued.
A Group of 20 statement issued earlier this month, backed by every member except China, implicitly called out Beijing’s reliance on exports for growth, putting the spotlight back on the yuan. A cheap currency boosts the already formidable competitiveness of Chinese exports.
German Chancellor Friedrich Merz has been pushing for a dialogue with Beijing over concerns that China may be maintaining an artificially weak currency to gain an advantage in global trade. Merz claimed in June that the yuan was undervalued by roughly 30%.
Despite the global discontent, economists say Chinese authorities are unlikely to allow fast currency appreciation because of the potential for negative side effects. A rapid strengthening of the yuan would erode China’s international competitiveness, slowing exports and economic growth, said economists at Goldman Sachs.
“But a moderate pace of appreciation — perhaps 3-5% a year against the dollar — would not impede ongoing market share gains,” the Goldman Sachs economists said in a recent note. Permitting the yuan to appreciate nominally against the dollar might also be viewed as a sort of olive branch that could defuse the risk of a unified tariff pushback, the bank said. The move could also help bolster Beijing’s efforts to make the yuan a more internationally used currency within the dollar-dominated global financial system, according to Goldman Sachs.
Economists at Morgan Stanley wrote that yuan weakness reflects China’s new economic reality following the property-sector bust, which depressed investment and consumer sentiment. Removing a major source of investment demand in property infrastructure while saving rates stayed high translated into a larger current-account surplus and a weaker currency, they said.
“Engineering a sharp appreciation shock would treat the symptom rather than the underlying imbalance,” Morgan Stanley economists said in a note earlier this month. A more durable adjustment, they wrote, would be to reduce the saving-investment imbalance by lifting household income, strengthening the social safety net and shifting fiscal support toward consumption and public services, “while allowing the property correction and excess capacity to work through.”
Even if Beijing allows faster appreciation of the tightly-controlled currency, that alone won’t be enough to curb China’s ballooning trade surplus, economists say. The country’s exports are built on a strong base of manufacturing and technological capacity that cannot be attributed simply to an undervalued currency.