China Loosening Yuan Controls Signals Appreciation Will Endure

China Loosening Yuan Controls Signals Appreciation Will Endure

China has taken more steps this month to loosen its grip on the yuan than at any time since curbs were imposed in the aftermath of a chaotic devaluation in 2015.

Although the changes were widely interpreted as an attempt to slow the currency’s appreciation, they have been deployed without significantly weakening the yuan or destabilizing global financial markets. Instead, the result has been a steady Chinese currency that remains near a two-year high — potentially emboldening officials looking to push ahead with yuan reform.

A growing consensus among analysts is that the yuan has every reason to stay strong, even if appreciation happens at a slower pace from now. Higher-yielding Chinese assets will continue to attract foreign capital into mainland bond and equity markets, and the country’s economy is recovering faster from the virus pandemic than elsewhere.

Paring back control helps liberalize China’s currency market, an important component of Beijing’s long-term plan to encourage greater global usage of the yuan. Reducing China’s reliance on the U.S. dollar is increasingly pressing as tensions with Washington spill over to the financial sphere.