Currency traders with a taste for roller-coaster price swings had better steer clear of China’s currency.
The yuan, also known as the renminbi (“people’s money”), may be traded on international markets, though, in contrast to the world’s other major currencies, its value is not determined by supply and demand but by the Chinese officials that manage it. As a result, the yuan barely moves against the dollar and the euro.
Admirable stability, or currency manipulation?
One yuan is currently worth $0.15 and €0.13. A month ago, it was worth $0.16 and €0.13.
On 31 October last year, the yuan was worth $0.14 and, on 29 September, it traded at €0.12.
Go back five years and little has changed. On 21 March 2014, it traded at $0.16 and €0.12.
Similar stability is seen in its exchange rate against sterling and the yen, as well as against the currency of one of China’s major trading partners, the Australian dollar.
To some, this predictability is admirable, and was the norm across the western world in the post-war era of the Bretton Woods fixed exchange rate system – named after the New Hampshire hotel in which the system was agreed.
This had the consequence of piling up large foreign exchange surpluses in currencies for which the authorities had exchanged yuan.
But since the 2008 financial crisis, China has come under pressure, not least from the US, to allow the yuan to rise, with the aim of making western exports more competitive in Chinese markets.
China at the crossroads
In a sense, there was nothing new in accusations of undervaluation, given the US complained in the Sixties that the rising industrial powers of that time – Japan and West Germany – were depressing the value of the yen and the mark to grab export-market share.
And come September 2016, China’s money was given the seal of approval by the International Monetary Fund (IMF) when it was admitted to the fund’s elite basket of currencies alongside the dollar, euro, yen and pound.
Christine Lagarde, the IMF’s managing director, said: “The renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalising and improving the infrastructure of its financial markets.
The currency basket underpins the IMF’s “special drawing right”, an international currency used only among governments.
In the longer term, the outlook for the yuan is bound up with that for the Chinese economy. In July last year, the IMF warned that credit growth was excessive, adding: “China is at an historic juncture. After decades of high-speed growth, the authorities are now focusing on high-quality growth. Whether and how this shift is carried through will determine China’s development path for decades to come.”