Chinese yuan and US dollar banknotes. Image: Dado Ruvic / Reuters.

Since being set at the highest level to the US dollar (6.8319) in well over a year on September 3, the yuan’s central parity rate has stagnated in a narrow range of 6.8359 to 6.8423.

This Friday morning’s rate was set by the PBoC at 6.8389.

This should not be interpreted as an effort on the part of the central bank to rein in the currency’s rapid appreciation since early July. The appreciation of the yuan reflects the global outperformance of the Chinese economy in the second and third quarter of the year and net capital inflows to Chinese securities and on the trade account during that period.

The rise of the yuan paralleled the rise of the CSI 300 Shanghai Shenzhen stocks index from 4,100 levels at end-June to 4,800 levels by September 2.

Since then, the rout of vastly overvalued tech stocks in the United States, which has yet to be halted, has in milder form influenced several Chinese mega tech stocks and curbed yuan demand.

This in no way changes the yuan fundamentals; in fact, it underlines the Chinese currency’s positive fundamentals relative to the US dollar.

Much as the coal miner in “Sixteen Tons”, the song made famous by Tennessee Ernie Ford in 1955, the US is “another day older and deeper in debt” – and with absolutely no end in sight. If anything, a Democratic election victory in November would almost certainly make a bad debt accumulation binge worse.

By sharp contrast to the US, China, thanks to its rapid recovery from the Covid-19 pandemic, has been able to overcome the sharp economic downturn in the first quarter without massive new debt issuance and debt monetisation by the central bank.

This will continue to give Chinese money an advantage over the greenback.

Moreover, formal adoption of the so-called “dual circulation” policy in August, which stresses domestic demand expansion, requires a strong and strengthening currency for successful implementation.

There is every good reason for the PBoC to allow any yuan rise resulting from market forces to be sustained by monetary policy tools.

I expect the yuan to resume its rise after this week’s pause.

CNY traded at 6.8343 to the US dollar at 6pm HK time. Tech stocks on Friday showed some signs of recovery.

I see resumption by as early as Monday of the move toward 6.0 to the US dollar, my 2021 target. 

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This report appeared first on Asia Times Financial.

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