CHINA, AS ITS leaders like to observe, has fared better than any other big country this year. It has all but halted the covid-19 pandemic, got its economy back on track and, to top it off, reaped a cash windfall from abroad. The last has stemmed from a surge in its trade surplus, thanks in part to its factories running at full tilt, and a rush of money into its bonds, thanks in part to its growth outlook. Victors do, it seems, get the spoils. In economic terms, victors should also have a much stronger currency. But that has not happened. The yuan’s recent appreciation against the dollar has merely kept it in line with the yen and the euro. This raises the question, sure to rankle with officials in Beijing, of whether China is again manipulating its currency.
It is much harder to answer than in the past. For two decades until mid-2014 China’s prodigious accumulation of foreign-exchange reserves was the clear by-product of actions to restrain the yuan, as the central bank bought up cash flowing into the country. A sharp drop in reserves in 2015-16 was evidence of its intervention on the other side, propping up the yuan when investors rushed out. Since then, China’s reserves have been uncannily steady. This year they have risen by just 1%. Taken at face value, the central bank seems to have refrained from intervening. That is certainly what it wants to convey, regularly describing supply and demand for the yuan as “basically balanced”.
The past half-year therefore presents a puzzle. Given that China has racked up big inflows, how can the yuan have remained stable without an offsetting increase in foreign-exchange reserves? One possible explanation lies on the balance-sheets of its commercial banks. Their foreign assets, net of liabilities, have soared by $125bn since April. China’s big banks are all state-owned, so it is conceivable that the government has used them as proxies. Adding their foreign holdings to official reserves paints a picture more suggestive of intervention to suppress the yuan (see chart).
Several currency traders sense the hand of the state, albeit more discreet than in the past. “My guess is that the central bank now has special trading accounts at the state banks,” says one. Yet it is not an open-and-shut case. Exporters themselves have wanted to keep a large portion of their revenues in dollars, worried that friction with America could end up hurting the yuan.
China also has many tools for influencing the exchange rate beyond direct intervention. On October 12th the central bank made it cheaper to short the yuan in forward trades, a signal that it wanted to limit appreciation. Then on October 23rd a currency regulator said that a “smart market” would always consider upside and downside risks, a reminder that China wants the yuan to be volatile but within a fairly tight range. “Chinese officials have perfected the game of telling American officials that they are not intervening while persuading market participants that they will intervene if necessary,” says Brad Setser of the Council on Foreign Relations, a think-tank, who also advises Joe Biden’s team.
If China is intervening, the most charitable defence is that it views its big lead in GDP growth as transient. A big jump in the yuan when other countries are hobbled would set it up for a potentially destabilising fall when they recover. Leaning against appreciation helps prevent that. But if China’s outperformance endures without being reflected in the yuan, charitable feelings will quickly evaporate. ■
This article appeared in the Finance & economics section of the print edition under the headline "Caveat victor"
