Firms ought to anticipate the Chinese language yuan to grow to be extra risky, the regulator stated

BEIJING – China’s foreign exchange regulator on Friday urged companies to prepare for higher yuan volatility.

The Chinese currency, also known as the renminbi, gained around 1% against the US dollar this week to levels not seen since July 2018. Less than five months ago, the yuan was the weakest against the greenback since early 2008. Based on a midpoint set by the central bank, People’s Bank of China, Beijing has allowed markets to play a bigger role in the exchange rate.

The yuan’s implied one-year volatility has risen to 5% from less than 2% in previous years, suggesting a basis for “increased flexibility” in the exchange rate, Wang Chunying, spokeswoman for the state foreign exchange administration, told reporters on Friday .

“In the face of exchange rate fluctuations, companies should raise awareness of risk prevention,” Wang said, according to a CNBC translation of her mandarin-language remarks. She said that instead of expecting the yuan to strengthen or weaken unilaterally, companies should prepare for mutual exchange rate changes and hedge appropriately without speculating.

Daily Midpoint of the Chinese Yuan against the USD (2008-2020)

Note: Lower numbers reflect a stronger yuan against the USD. Source: wind information.

On Friday, the central bank’s official daily mid-day was 6.6703 yuan against the US dollar, up more than 4% from the year’s greenback so far.

The yuan’s recent strength is due to the US dollar index falling to its lowest level since early September. While the yuan’s exchange rate against the greenback is closely monitored, officials previously stressed that the currency’s value is more accurately represented by a government-run index of the yuan against a basket of currencies. The index’s last weekly pressure on October 16 was the highest since March.

When asked about the outlook for the Chinese currency by CNBC last week, CNBC’s head of monetary policy at PBoC said the central bank would maintain a flexible and stable exchange rate.

“The slight appreciation of the yuan exchange rate is a natural reflection of the good development of the (Chinese) economy,” Sun said at a press conference, according to a CNBC translation of his Mandarin-language remarks.

In August 2015, the yuan’s surprising devaluation of more than 4% in five days shocked global markets. The PBoC has sought to strike a balance between the yuan’s weakness in order to keep Chinese goods attractive to overseas buyers and to prevent domestic capital from flowing out of the country into stronger currencies too quickly. In the longer term, Beijing wants the yuan to be used more internationally, compared to the current 2% of global foreign exchange reserves.

Analysts believe that China’s relatively robust economic growth and market size will attract more foreign capital in the coming years.

The International Monetary Fund forecast last week that China’s GDP will grow by 1.9% this year. This is the only major economy that will expand after the coronavirus pandemic. Covid-19 first emerged in the Chinese city of Wuhan late last year before accelerating its spread in the country and then overseas.

The IMF predicts that the US economy will shrink 4.3% this year, with global growth falling 4.4%.

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