This morning has brought some news that brings an old theme on here to mind. In fact two parts of it. There was the theme of currency wars from over a decade ago and the consistent attacks from the US Treasury that China has devalued its currency to gain a competitive economic advantage.
The People’s Bank of China has decided to lower the foreign exchange risk reserve ratio for forward foreign exchange sales to 0.
So lowering a risk reserve ratio to zero is rather clear! Let us look further.
To promote the development of the foreign exchange market and support enterprises in managing exchange rate risks, the People’s Bank of China has decided to lower the foreign exchange risk reserve ratio for forward foreign exchange sales from 20% to 0, effective March 2, 2026. Going forward, the People’s Bank of China will continue to guide financial institutions to optimize their exchange rate hedging services for enterprises and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
Okay so it starts Monday and we note the euphemism “optimize their exchange rate hedging services for enterprises ” which means they want them to do something. If you did not pick that then there is a classic of the official intervention language at the end.
maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
They mean the level which their political masters have instructed them to achieve. This is always “reasonable” to them at least. It also highlights a feature of how China intervenes in currency markets these days.
A cut in the ratio reduces the funds that commercial banks are required to set aside when selling foreign exchange forward to clients. This lowers banks’ costs and reduces expenses for enterprises seeking to lock in future foreign exchange purchases through forward contracts. (China Daily)
It gets others to do it for it. In the short-term of a few hours it seems to have worked.
Following the announcement, both the onshore and offshore yuan fell against the US dollar, trading below 6.85 in the morning session. On Thursday, the offshore yuan rose above 6.83 against the greenback, its strongest level since early 2023. ( China Daily)
Why?
If we ask the Carly Simon question then we see that China Daily has given us a hint pointing out that the Yuan has risen to its highest level since 2023. This is a complex area in that we know from his first term that President Trump is happy to see a lower US Dollar and this time around looks to have been aiming at that with this.
WASHINGTON, Feb 20 (Reuters) – U.S. President Donald Trump on Friday, citing his pick to succeed Federal Reserve Chair Jerome Powell, said he expected interest rates to come down substantially.”We have a very incompetent Fed chairman who likes high interest rates – for political reasons he likes them – but we’re going to have somebody very good, interest rates should down very substantially,” he told a briefing.
As is his wont he has been very clear about this and it would be hard for him to have been much clearer. Returning to today’s subject we see that the Yuan had appreciated by just under 6% over the past year versus the US Dollar. So that seems to be the Chinese threshold for currency pain. Along the way we can note that they seem willing to ignore the contribution made to the low levels of consumer inflation via an appreciating exchange-rate.
Japanese Yen
It is quite clear that Japan has stolen a march here if the game is to drive your currency lower. A single Yuan buys 22.8 Japanese Yen and that has rallied by 10% over the past year and is as big a factor in Chinese thinking as the Dollar move in my opinion. The overall move started with the Yuan at 17 Yen back in 2021 and the pace has picked up over the past year. In price competitive markets the Japanese have stolen a march on China.
It seems to be the policy of the new government.
The yen had weakened on Wednesday after media reports said Prime Minister Sanae Takaichi struck a cautious tone on further rate increases and following the nomination of two dovish-leaning candidates to the BOJ board. (Investing.com)
I did point out recently that the promised rise in interest-rates was being made by people who do not believe in it.
“We continue to believe it is more probable that a rate hike will occur in June rather than in April, following confirmation of the Spring Wage Negotiations securing above 5% growth and April inflation data,” they added. ( Investing.com)
It may well end up as one of the slowest set of interest-rate increases in history.
The Euro
This has been the opposite situation. Regular readers will have followed by updates on European leaders and ECB President Christine Lagarde in particular lauding the Euro. They have been busy slapping themselves on the back as China has seen the Euro rise by 6% over the past year versus the Yuan. So we have seen it rise by more versus the US Dollar and even more versus the Japanese Yen.
These people are not fans of a stronger currency per se it is just that it has been something to cling too at a time when they are under fire on quite a few fronts. From only yesterday.
The real issue is the euro-dollar exchange rate: with a currency that is too strong we lose competitiveness compared to countries like Japan’. Thus the president of Confindustria Emanuele Orsini in an interview with il Giornale.
“Undoubtedly we have a problem” with China, continues Confindustria president Emanuele Orsini, “suffice it to say that in 2025 Italia had a positive trade balance of 34 billion with the United States and a negative balance of 46 billion with China, which is also increasing.
Earlier this month I noted the French version of this.
PARIS, Feb 9 (Reuters) – The European Union should consider either an unprecedented 30% across-the-board tariff on Chinese goods or a 30% depreciation of the euro against the renminbi to counter a flood of cheap imports, a French government strategy report said on Monday.
This adds to the European problem of high energy costs and a bureaucracy which loves regulation.
Comment
What we are seeing here is another phase in the ongoing currency wars. The last 6 months or so have been dominated by fiat currencies devaluing against precious metals but now we have returned to more conventional fare. China is pushing hard for ever more manufactured exports and as a minimum wants to halt the rise in its currency to help with that.