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Why China is warning of yuan speculation when the currency looks so stable
- The yuan-dollar rate is stable but the official yuan index has surged against a basket of currencies. There are legitimate reasons for this, such as strong exports
- But the concern is of the systemic risk of proprietary carry trades and the massive leveraging at banks and financial firms looking to profit from higher yuan returns
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Hao Zhou currently serves as a senior economist (emerging markets) with Commerzbank.
In a meeting hosted by the People’s Bank of China, Chinese financial regulators’ warning against so-called speculation in the foreign exchange market has attracted much attention. Yet the Chinese currency has been quite steady this year, with the US dollar-to-yuan exchange rate mainly keeping within a narrow range of 6.3-6.4.
Compared to many other emerging market currencies, such as the Turkish lira that recently hit record lows, the Chinese currency looks much more resilient. So why, despite a stable currency, do the authorities see a risk of speculation?
Although the Chinese authorities constantly stress the importance of stability, it is hard to define. In the world of foreign exchange, there are a few dimensions of “stability”, and sometimes these dimensions are contradictory.
For instance, while the dollar-yuan exchange rate remains stable, the official yuan index, which measures its performance against a basket of currencies, has been surging over the past few quarters.
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