A Rising Yuan Sets the Stage for More China-U.S. Currency Friction

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The People’s Bank of China is getting restive about the strength of the Chinese yuan. That is something to keep an eye on: Any attempt to prevent it from rallying further would provide fresh fuel for a clash between Beijing and Washington over currency manipulation.

At around 6.38 to the U.S. dollar, the yuan is at its strongest level since 2018. The currency needs to rise by only a little over 5% to hit a historical high. It has rallied by almost 12% in the past year already.

The PBOC said Monday that it would raise foreign-exchange reserve requirements for banks after a former central-bank official suggested to state media over the weekend that the currency’s recent strength wasn’t sustainable or desirable.

Given the central bank’s clear discomfort with the rally, the fact that China’s foreign-exchange reserves have barely risen in the past year is eyebrow raising. In the 2000s and early 2010s, China’s large trade surpluses were mirrored by large reserve accumulation.

Since the beginning of 2020, Chinese reserves have risen by 2.9% in U.S. dollar terms, compared with increases of 10.6% and 13.2% in South Korea and Taiwan, two economies that have recorded similarly strong export growth and strengthening currencies during the pandemic.

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