China's yuan dilemma: too weak abroad and too strong at home
FXI•The yuan has risen nearly 5% against the dollar and about 9% against the euro this year, squeezing Chinese exporters’ margins as overseas officials argue it remains undervalued. Analysts expect Beijing to take incremental steps to slow further gains.
1. Exporter margins tighten
Chinese exporters say the yuan’s recent strength has raised the cost of their products abroad and eroded already-thin profits. Chen Lifeng, who runs Ningbo Tengsheng Garments, said the currency’s rise had hurt the company’s ability to take orders and warned it might not stay in business if the yuan keeps rising.
2. Possible policy response
The People’s Bank of China said Tuesday it would raise the foreign-currency reserve requirement for financial institutions, signalling concern about the yuan’s rapid strengthening. Analysts expect incremental measures to restrain gains, including further reserve increases or weaker daily fixings, but few anticipate a radical shift in currency policy. Goldman Sachs expects the yuan to strengthen to 6.40 per dollar over the next 12 months, from about 6.70.
3. Dispute over valuation
The IMF estimated in July that the yuan’s real effective exchange rate was undervalued by 17.3% to 25.3%; German Chancellor Friedrich Merz put the undervaluation at 25% to 30%. The PBOC says China has not pursued competitive devaluation and that the yuan is fairly valued under other models. A Reuters analysis found median first-half net margins of 4.9% among 5,209 Chinese-listed companies, compared with 8.9% for global competitors.
