The dollar versus the yuan
Despite last year’s inclusion of the yuan in the International Monetary Fund basket of currencies, its use in international trading went down not up. In 2016 it fell 6.5 per cent against the dollar, and while holding its value in 2017 it has weakened against other currencies, falling against 14 of its major peers.
One reason for this weakness is that many Chinese traders and investors have switched back to using the dollar in response to the volatile and weakening yuan. However, the government is still encouraging settlement in yuan. China is increasingly using yuan rather than dollars to pay for big-ticket items such as oil and is also trying to use yuan-denominated loans for major infrastructure projects such as those along the Belt and Road.
Yuan is also becoming more popular as a payment and reserve currency in African countries including Angola, Ghana, Nigeria, Mauritius, Zimbabwe and South Africa.
These factors suggest that the currency will strengthen over time and businesses will have more confidence in using it.
Indeed, there are already signs of this. In May Chinese policymakers indicated they might introduce a “counter-cyclical factor” to the yuan’s daily fixing which would give authorities more control over its value.
The yuan strengthened immediately to reach almost a seven-month high. Then in early June the foreign-currency regulator announced that from September Chinese banks must report all overseas ATM or credit card transactions by their customers above 1,000 yuan (Bt5,000), adding to previous moves designed to prevent capital flight.
Over the past year China’s export performance has improved and foreign reserves have risen, increasing to $3.05 trillion at the end of May, and now the emphasis is on stabilising international fund flows and the exchange rate.
The latest interest rate increase by the US Federal Reserve is likely to boost the dollar’s value. Beijing’s recent moves suggest the yuan will also be allowed to appreciate as this would suit its stability objectives.