Why this is important to Wisconsin businesses: The currency's strong performance relative to the dollar means China's demand for U.S. imports is likely to increase.
China’s yuan recently strengthened to a new high against the U.S. dollar in the past 15 months. In August, the yuan rose by a record-breaking 2.08 percent—the highest monthly growth since the 2005 reform of exchange rate rules for the yuan. On Sept. 4, the exchange rate of the yuan closed at 6.5269 per dollar, up by 5.6 percent since the beginning of the year.
The People’s Bank of China raised its official yuan midpoint to 6.59 per dollar last week, past the key psychologically important 6.6 level for the first time since June 2016. It is predicted that there will be ups and downs around 6.5 per dollar in the next a few months, and the strong performance of the yuan will continue at least until the opening of the 19th Party Congress in mid-October. Some institutional investors consider the strong bounce-back of the yuan this year somewhat unexpected after its weakening in 2016, when the yuan depreciated by 6.5 percent. One reason for the yuan’s strengthening might be the regulations the government implemented last year to tighten capital controls in an effort to curb the escalation of capital outflow. At the same time, the People’s Bank of China has also been selling U.S. dollars to support the yuan. Apart from these political and regulatory reasons, the yuan’s stronger performance is also likely to be a result of the weakening U.S. dollar and China’s continuous economic stability.
Since the U.S. government has long pushed China to allow its currency to appreciate at a faster speed, a stronger yuan may be good news for the U.S. government and industries that export to China. As the prices of U.S. products become more attractive to Chinese importers and consumers, the yuan’s appreciation tends to stimulate China’s domestic demand for imports from the U.S. Conversely, Chinese products may become less attractive to U.S. consumers as the prices go up, leading to a decrease in consumer demand for imports from China. If the trend continues in the coming months, the U.S. trade deficit to China could be reduced significantly, which would be expected to create more job opportunities in U.S.
Wisconsin companies should monitor exchange rate trends and consider increasing their focus on exporting to China.