China tightens control to restrain currency’s rise

PTI, Dec 10, 2021, 8:14 AM IST

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Beijing: China’s central bank is trying to restrain the rise of the yuan after the currency hit a 2 1/2-year high against the dollar.

Commercial banks were ordered Thursday to increase the amount of their foreign currency deposits that are held as reserves for the second time this year. That reduces the amount available for trading, making it easier for Beijing to manage the exchange rate.

The People’s Bank of China is trying to make the yuan’s state-set exchange rate more flexible and market-oriented but has intervened over the past year to restrain its rise. Those controls are an irritant in relations with Washington, which complains that a weak yuan makes China’s exports improperly cheap and swells its multibillion-dollar trade surplus.

The yuan has gained a modest 2% against the dollar since mid-August, but that was enough to boost it to 6.3762 to the dollar this week, its highest level since May 2018. That makes one yuan worth about 15.7 cents.

Thursday’s order raised banks’ foreign currency reserves to 9% of deposits from 7%. It was increased to that level from 5% in May, the first change since 2007. Economists said then that it locked up about $20 billion in foreign currency.

The ruling Communist Party said in 2015 the yuan would be made a “freely tradable and freely usable currency” by last year. But it has kept controls in place due to concern about swings in the exchange rate and the flow of money into and out of the world’s second-largest economy.

A rising yuan threatens to make China’s exports more expensive abroad, hampering a manufacturing revival following last year’s slump. A stronger yuan would make imported oil, iron ore and other raw materials cheaper for Chinese manufacturers.

In 2017, the central bank tightened controls on trading to stop a fall in the yuan’s value after a change in the mechanism used to set the exchange rate triggered a flurry of selling.