MNI INTERVIEW 2: China Needs Strong Yuan To Support Imports

A stable and marginally stronger yuan will benefit China’s imports and boost the value of the nation’s financial assets this year, a prominent trade advisor told MNI in an interview.

A weak yuan has hurt imports, which declined 5.5% y/y in U.S. dollar terms in 2023 to their lowest level since 2016, said Zhao Jinping, senior research fellow at Chongyang Institute of Financial Studies of Renmin University of China, pointing to the higher imported price of energy and resources. (see:MNI INTERVIEW: China EM Trade To Rise, Despite Western De-risking)

Beijing’s forex policy has increasingly played down the mandate of promoting exports, and a cheap yuan would also impede high-tech expansion, he added, noting microchip, semiconductor and mechanical equipment trade makes up the major part of imports and plays a key role in “high-quality growth”.

Forex policy should emphasise support for imports and stable financial markets over just boosting exports, which has been the emphasis over recent years, said Zhao, former director-general of the Research Department of Foreign Economic Relations at the Development Research Center of the State Council, predicting the yuan would remain rangebound with a tilt towards appreciation this year.(see:MNI: More Yuan Volatility Ahead, PBOC Vigilant)

Currency depreciation has restrained the central bank’s easing pace as a large rate cut would increase capital flows to the U.S and worsen the yuan’s performance, he warned.

However, the People’s Bank of China still has significant room to cut interest rates and banks’ reserve requirement ratio due to tepid inflation, he said. China risked deflation should CPI growth remain below 1% in the long term, he warned.

Headline CPI printed at 0.2% y/y in 2023, its lowest level since 2009.

China’s M2 money supply gauge remained in expansion at 8.7% y/y in February and while some have argued this was not a sign of deflation, Zhao noted that M1 – which rose 1.2% y/y in February, its lowest since January 2022 – was more telling since some liquidity has been converted into time deposits rather than boosting investment.