Yuan’s unexpected rise against US dollar calls for caution, careful management

The yuan has strengthened against the US dollar in the past few months, an unexpected development for China, which was preoccupied with currency depreciation in 2016 and at the beginning of this year. China needs to control the pace of the yuan’s rise, as an appreciation that is too strong or too fast is as dangerous as a sharp depreciation in the currency.

On Tuesday, China raised the midpoint yuan rate for the seventh straight session to 6.5370 per US dollar, the strongest level since May 2016. The yuan’s recent appreciation was mainly a result of a weaker US dollar – it was not completely supported by China’s still-shaky economic recovery.

With expectations for a short-term appreciation of the currency, there has been a surge in exchange settlements and companies are selling US dollar positions, which has pushed up the yuan’s value. It is possible as well that speculative transactions have propelled demand for the yuan.

Some people may be glad to see the yuan appreciate at the moment, because a weaker yuan may lead to capital outflows, but a sharp rise of the yuan is hardly a good thing.

First, if the yuan is seen as a safe haven currency in times of regional economic turmoil caused by the escalating North Korea nuclear crisis, China will likely receive vast speculative hot money inflows, which will fuel the country’s asset bubbles.

Second, a sharp rise in the yuan will deal a heavy blow to exports and hamper the economic recovery.

During the first seven months of 2017, China’s exports rose 8.3 percent year-onyear.

The rebound from a yearslong rout in export expansion was a hard-won achievement for China when it comes to supporting the economy.

Third, if the real economy is not strong enough to justify a sharp rise of the yuan, an appreciation that is too rapid will just lead to disaster after risks build up to an unbearable level.

China needs to damp down expectations of yuan appreciation to create two-way movement in the foreign exchange market. Efforts to curb speculation and improve transparency in the market are vital steps to help curb irrational investment.

Reducing appreciation expectations calls for courage and flexibility. A sharp rise of the yuan may create sense of pride among Chinese people, especially when several major world currencies have weakened due to their poor economic performances. But China needs to keep an eye on the pace of the yuan’s rise, because a sharp appreciation may have a negative effect on its economy.