China’s currency, the yuan, strengthened to a six-month high against the U.S. dollar yesterday, as the country’s central bank set a sharply stronger midpoint amid concerns that China’s economy is slowing. While the value of the yuan had decreased for the first four months of 2014, it has been steadily appreciating since May following data that shows a record trade surplus in China.
As a reaction, The People’s Bank of China boosted the currency’s daily reference rate by 0.3% to 6.152 per dollar, the largest one-day increase since November 2010 and the strongest level in four weeks. Exports exceeded imports by $49.84 billion in August, from the previous record of $47.30 billion in July, numbers that are causing China’s central bank to inflate the value of the country’s currency. In fact, China's import growth unexpectedly fell for the second consecutive month in August, which indicated soft domestic demand, while exports were surprisingly strong. The result pushed the country’s trade surplus to an unexpected all-time high of $49.8 billion.
Ultimately, though, global governments – including that of the U.S. – have pressed China for years to allow its currency to be impacted by market forces and rise further against the dollar. The U.S. has accused China in the past of purposely deflating its currency so its exporters could more effectively compete in the global market. Now, though, concerned that its economy’s growth is slowing, China’s central bank is allowing its currency to appreciate.
In the short term, a rising yuan can also translate to increased costs of goods coming out of China, including the many promotional products that are manufactured there. Analysts, however, expect the upside of the yuan to be limited because of the current strength of the dollar. A Reuters poll published last week showed that the yuan is expected to appreciate slowly over the next year, changing hands at 6.12 yuan to the dollar in six months and 6.06 yuan in a year.