The People’s Bank of China is concerned about the strength of the Chinese yuan. It’s something to watch out for: Any attempt to prevent it from rallying further would provide new fuel for a confrontation between Beijing and Washington over currency manipulation.

At around 6.38 per US dollar, the yuan is at its highest level since 2018. The currency only needs to rise a little over 5% to hit an all-time high. It has already increased by almost 12% last year.

The PBOC on Monday said it would increase foreign exchange reserve requirements for banks after a former central bank official suggested to media over the weekend that the currency’s recent strength was neither sustainable nor desirable.

Given the central bank’s obvious unease with the recovery, the fact that China’s foreign exchange reserves have barely increased in the past year raises eyebrows. In the 2000s and early 2010s, China’s large trade surpluses were reflected in a large accumulation of reserves.

Since the start of 2020, Chinese reserves have grown 2.9% in US dollars, compared to increases of 10.6% and 13.2% in South Korea and Taiwan, two economies that have seen growth in stocks. equally strong exports and stronger currencies during the pandemic.

At first glance, this would suggest that the PBOC did not intervene much to control the appreciation of the yuan.

But other data tells a more complicated story. China’s balance of payments figures for the last quarter of 2020 showed a modest increase in reserve assets but an increase in two residual categories. The first, called “other investments”, covers transactions that cannot be classified as direct investments, portfolio investments or reserves. The second, “net errors and omissions”, is the last installment that guarantees the balance of the balance of payments. . The two categories combined reached more than $ 200 billion in the last quarter of the year, the highest level on record.

Part of the outflow may simply represent domestic borrowers taking advantage of the weak dollar and the strength of the yuan to repay dollar debt. Chinese new liabilities marked “loan” in the “other investment” category fell from $ 13 billion in the first quarter of 2020 to minus $ 44 billion in the last quarter of the year, which means a large-scale repayment.

But that still leaves much of the rest of these huge capital outflows as a question mark. Alex Etra, senior strategist at Exante Data and former Federal Reserve economist, noted that the two segments of the balance of payments align well with the accumulation of banks’ net foreign assets. And China’s central bank has long relied on state-owned banks to intervene in the forex market, avoiding doing the heavy lifting and all the attention it would bring.

This method of leaning against a new strength of the yuan is less in the headlines than the accumulation of reserves. But if that’s what is happening, it’s unlikely that it escaped the attention of the US Treasury Department. Going forward, it will be worthwhile to closely monitor not only the currency market, but also the details of China’s payment data to eliminate the potential for political unrest to come.

This story was posted from an agency feed with no text editing.

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