Yuan bulls boost U.S.-China trade talks
Yuan Bulls are pressuring US President Joe Biden to find a way to cut tariffs. The currency is on a meteoric rally, bolstered by foreign capital. Its strength has yet to eat into China’s trade surplus, but may impose higher prices on US consumers.
China used to lower its exchange rate to support low-cost exports, a bone of contention for a long time with US officials trying to rebalance trade relations. Nowadays, the country produces better quality products and imports more dollar denominated products, so removing the yuan makes less and less economic sense. In recent years, Beijing has had a much harder time keeping the renminbi (the currency’s official name) from overheating, and 2021 is proving particularly tricky.
The yuan is now changing hands at around 6.38 per dollar, its strongest position in three years, having strengthened by nearly 12% since May 2020. China’s relatively attractive interest rates and recovery economic activity prompted domestic and foreign investors to increase their holdings of renminbi-denominated assets. State media have taken to threatening speculators as regulators change policies, including increasing outbound investment quotas, to calm things down. Barring a surprise rate hike from the Federal Reserve or of a drastic relaxation of Chinese capital controls, greater appreciation seems certain.
The question for China’s trading partners is whether their importers will continue to absorb this impact of the exchange rate or begin to pass it on to consumers. A stronger yuan comes on top of rising commodity prices and supply chain shortages. In the United States, tariffs of around 19% on average were applied to two-thirds of Chinese products exported. Consumer prices in the United States rose the most in nearly 12 years in April. While a little inflation is welcome, a sharp rise could jeopardize the economic recovery.
China has failed to meet its commitments under the Phase 1 trade deal, and in theory, this allows Washington to tax Chinese imports even more. Yet homework fell short of its goal and is now in danger of backfiring dramatically. Diplomatically, Washington might not want to give Beijing something for nothing, but luckily China has tariffs it could lower in return. Now is the time to strike a deal.
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– China’s central bank on May 31 ordered financial institutions to keep more foreign currency in reserve after the yuan hit a three-year high against the dollar.
– Spurred on by surging export earnings and investment flows, the value of cash deposits in Chinese banks exceeded $ 1 trillion for the first time in April, according to official data. In the 16 months to April, dollar deposits increased by $ 242.2 billion, according to PBOC data, more than inflows into the Chinese bond market, which totaled around $ 220 billion for the year. period.
– A private survey of the manufacturing sector showed that the price of exported Chinese products rose at the fastest pace in three years in May.
– US Trade Representative Katherine Tai told members of Congress on May 12 that her office is doing a “top-down” review of Chinese policies.
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