China raises the yuan exchange rate before Trump and Xi meet economy

The People’s Bank of China (the central bank) set the daily reference rate for the yuan against the dollar at the highest level in 3 years, indicating that the Chinese authorities accept a stronger currency ahead of an upcoming meeting this week between Chinese President Xi Jinping and US President Donald Trump, according to the British Financial Times.

The newspaper said that the Chinese central bank fixed the reference price, yesterday, Monday, at 6.8467 yuan to the dollar, which is the strongest level of the Chinese currency since March 2023, while the yuan circulating inside China rose to 6.795 yuan to the dollar, exceeding the level of 6.8 for the first time since February 2023.

Despite the rise of the Chinese currency in the spot market, analysts said that the central bank set the reference price at a weaker level than market expectations, an indication that Beijing does not want a rapid rush in bets on the rise of the currency before the Trump-Xi meeting.

The Financial Times quoted Mitul Kotecha, head of currency and emerging markets strategy at Barclays Bank, as saying that China tends before important meetings to keep the currency relatively stable, or allow it to rise slightly, adding that the authorities are “pushing in a direction that is against the pace of the currency’s rise, but they are relatively comfortable with the trend.”

Trade tension

The issue of the Chinese currency exchange rate occupies a fundamental place at the heart of the trade tension between China and the West, led by the United States, as America and Europe say that the inflated Chinese trade surplus is partly due to keeping the yuan at artificially low levels.

Washington complains that the decline in the yuan gives Chinese exports a price advantage in global markets, because the decline in the currency makes Chinese goods cheaper when priced in dollars or euros, which helps Chinese companies increase foreign sales and protect their market share, even with weak domestic demand.

On the other hand, the Chinese Ministry of Foreign Affairs says that the price of the yuan is not the reason behind the imbalance in trade with the United States. The Chinese news agency “Xinhua” quoted the Governor of the People’s Bank of China, Pan Gongsheng, as saying that China “needs and does not intend” to gain an advantage in foreign trade by devaluing its currency, and the Chinese Central Bank confirms that “the market plays a decisive role in shaping the exchange rate, while preventing excessive fluctuations.”

China benefits from the weak currency by supporting the export sector, raising the competitiveness of factories, and alleviating the impact of internal pressures on growth. The decline of the yuan also helps maximize the value of revenues achieved by exporting companies when converting the dollar into the local currency.

The Financial Times reported that the yuan declined last year by about 8% against the euro, which helped increase Chinese exports to the European Union to record levels, and raised fears of a second wave of what is known as the “China shock.”

Standard surplus

Goldman Sachs analysts wrote in a recent note that optimism about the exchange rate was boosted by hopes for the success of the Xi-Trump meeting, but they noted that there are underlying economic forces pushing the currency to improve.

According to US bank analysts, China’s external surplus is approaching unprecedented levels as a share of global GDP, reflecting deep levels of export competitiveness, coupled with a “significantly undervalued” currency.

Goldman Sachs estimates that the yuan is undervalued by about 20%, and expects its continued appreciation against the dollar.

The yuan’s improvement comes with signs of easing deflationary pressures in the world’s second-largest economy, as official data showed that China’s consumer price index rose 1.2% in April, near its highest level in 3 years, and above analysts’ expectations, while the producer price index rose 2.8%.