The Chinese yuan has significantly strengthened against the dollar to 6.5 CNY from 7.2 in May.
It has also strengthened against the euro which now buys 7.9 CNY, down from 8.3 in July.
In an apparent reverse of their course from devaluation to counter the tariffs, Chinese policymakers are now happy to let their tightly controlled currency strengthen.
“Yuan appreciation is supported by China’s economic fundamentals,” said Yu Yongding, an influential government economist who previously advised the People’s Bank of China. “We don’t need to intervene.”
They expect this strengthening of yuan to affect their exports as goods become more expensive, but for now they’re not concerned about it.
“We should not worry too much about yuan rises,” said a policy insider according to Reuters.
“The yuan is still within a normal range and there is no big deal if it rises a bit further. There could be some impact on exports going forward, but the impact is not big now.”
The Chinese economy has seen growth this year, while America and Europe has contracted. That has led to output rising with China’s industrial robot production, for example, surging 38.5 percent year on year in October to 21,467 units according to official data.
As there is simply more demand for goods than they can handle, especially in regards to masks and much else, the yuan has strengthened.
This new demand was caused in part due to far too stringent lockdowns in the west where manufacturers were closed, while in China they remained open generally even during the peak.
But this difference in output is unlikely to be the full story because China has grown way faster than the west for decades, with this gap in economic performance between the two being not much different than in previous years.
In addition China’s willingness to signal to the market they won’t intervene may indicate this strengthening serves some policy aim.
In particular China has been buying quite a few little known but potentially strategically important companies in Europe and the West.
During this economic downturn many western companies may be in distress, so making them cheaper. A strengthening yuan makes them even cheaper, thus a Chinese buying spree could well be an explanation for China not buying dollars or euros as it may have done in other circumstances.
The cheapening dollar and euro may however make their exports more competitive, but the Chinese market is very protectionist and can be described as a semi-planned economy with the Chinese Communist Party able to directly intervene as shown by its recent reprimand of Ant Financial.
This unequal trading relationship has been open to fierce criticism with Europe claiming they working on a level playing field with China which stands under significant pressure to open its market.
They may well give some carrots to Germany, but it’s unclear whether the fundamental lack of rule of law in a country that lacks an independent judiciary can be addressed to the point European companies can be sure their property rights, including intellectual property, are not violated.
In addition, the tightly enforced capital controls in China makes retail trade more one way, with a good example being the fact China has banned crypto exchanges but effectively subsidizes crypto miners with cheap energy, leading to a concentration of bitcoin mining in the country.
Their yuan moreover is so tightly controlled they have two tickers: CNY for within China and CNH which semi free floats in Hong Kong primarily for western investors.
Making all this in many ways an exploitation of the global free trade rule based system shown clearly in their CNY which they devalued at will to counter tariffs last year and now let strengthen at an opportune economic period perhaps in part to buy cheap western companies in distress.