(ANTIMEDIA) — China is struggling to rein in the yuan in its global currency chess game against the United States, the Wall Street Journal reports.
According to the WSJ, after spending most of last year defending the yuan, China’s central bank is looking to “rein” in its recent ascent, which has been a notable climb compared to the dollar. From the WSJ:
“Driven by an unexpectedly prolonged softening of the dollar, the Chinese currency has surged to around its strongest level against the greenback since its surprise devaluation in August 2015. The yuan is now on track for its best monthly performance since April 1980, rising 3% against the dollar so far in January.” [emphasis added]
However, according to the WSJ, the yuan’s move coincides with a number of other currencies that are fast covering ground against the dollar. The euro has reportedly made a 3.5 percent gain while the Japanese yen has made a 3.8 percent gain against the dollar so far this month.
Just last Friday, the yuan made a further 0.2 percent gain against the dollar.
The WSJ describes this success as somewhat of a “policy headache” for the Chinese government, which regularly devalues its own currency to maintain an edge in exports. If the yuan keeps increasing, government advisers and analysts predict it “could encourage speculative fund flows from overseas and hurt exports amid already rising trade tensions between China and the Western world, particularly the U.S,” the WSJ reports.
“This is not what the central bank would like to see,” said Xiao Lisheng, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
“The central bank wants the renminbi (yuan) to move up and down according to market supply and demand,” he added. “Now it’s basically being held hostage by the dollar index.”
However, despite this, one thing the WSJ fails to mention is the fact that the U.S. is fast losing its control over the global financial market as country after country begins adopting the yuan for global trade.
According to the WSJ, the People’s Bank of China, which fixes the yuan’s daily official rate, allows the yuan to strengthen if the dollar weakens, and vice versa, allowing the yuan to weaken if the dollar strengthens. This predictability allows for safe “one-way bets,” though it seems to indicate that should the dollar start to strengthen again this year, China may put a dent in the yuan’s rise.
The issue for China, of course, is that in return, a weak yuan brings in a ludicrous amount of money into the country from its trade with the U.S. As the WSJ explains:
“The lag effects of the yuan’s sharp depreciation in 2016 helped lift Chinese exports last year, with China’s annual trade surplus with the U.S. widening to a record $275.8 billion, based on Chinese data.” [emphasis added]
That being said, the WSJ predicts that the yuan will continue to rise throughout the year, stating:
“Many investors expect the yuan to strengthen further against the dollar, largely on their belief that the dollar’s broad-based pullback isn’t done yet. Still, some investors say they have started to hold on to their bullish yuan bets for shorter periods this year, taking profits when possible given how much the currency has already risen.”