Yuan‘s Jump to One-Year High Tests China’s Tolerance for Gains

A surge in China‘s yuan to a more than one-year high is testing the central bank’s appetite for currency strength.

China‘s currency has climbed more than 5% from this year’s low in May, the best performance in Asia. A strong yuan is an obstacle when the nations economy is recovering from the coronavirus pandemic and confronted with escalating tensions with the U.S. because it could undermine the attractiveness of exports.

The yuan‘s gain versus its trading partners’ currencies is smaller compared with its move against the dollar. The Bloomberg CFETS RMB Index Tracker, which measures the yuan versus 24 peers, has risen just 2.4% from a record low last year. The gauge currently stands at 92.95.

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“The yuan will likely advance further as the dollar weakens,” said Tommy Xie, an economist at Oversea Chinese Banking Corp. “The central bank could use the fixing to limit the gains when the yuan index climbs to 94 or 95.”

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The recent rally marks a turnaround from earlier in 2020, when the offshore rate neared the weakest level ever. The yuan has been resilient as China-U.S. disputes have expanded from a trade war to issues including the tech industry and a national security law in Hong Kong. Its interest rate premium over the greenback is near the highest on record, which attracts inflows to Chinese assets and boosts the currency.