According to Shen Hong’s WSJ article, the Yuan is at highs not seen in seven years due to government policy pushing the currency higher. Currency has been flowing out of China as the Yuan has weakened and Hong argues Beijing doesn’t want investors to get depreciating expectations for the Yuan, rather it wishes to see more two-way movement. This comes after an intervention, last year, on behalf of Beijing to lower the currency out of concern that foreign currency was flooding its economy driving asset prices higher; however, with the dollar appreciating in global markets the Yuan, which closely follows the dollar has also appreciated, making Chinese exports look more expensive and making it harder for Beijing to enact monetary policy. The move of Beijing to allow the Yuan is timely, because as the dollar also appreciates it will be comparatively easier for Chinese firms to pay off their large amounts of dollar-denominated debt. There are a lot of layers at work in foreign exchange markets.
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Indeed, the effects of currency disparities seem at the forefront of Asian trade at the moment. Korea, Japan, China, along with some smaller economies have all been battling to devalue their currencies. Whether this is sustainable, only time will tell.
The BIS (Bank for International Settlements, the club for central banks) provides inflation-adjusted, trade-weighted exchange rates on a monthly basis for an array of countries (61 for their broad index, which begins in 1994 and includes China). By their calculation, the yuan appreciated 38% over the past decade and 21% in the past 5 years.
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