The growing strength of the Chinese Yuan versus the U.S. dollar will not be sustainable, a former central bank official said Monday.
The former official said the rapid appreciation may have overshot, which means it is now bound for a correction.
The former director of the surveys and statistics department at People's Bank of China, Sheng Songcheng, said the sharp appreciation is likely due to short-term speculation.
"We will prevent short-term money flooding from pushing up the yuan and diminishing the competitiveness of export firms," Sheng said.
Last month, the Chinese Yuan had surged by 1.7% - trading at its highest levels in over three years. The currency's value versus the U.S. dollar breached the psychologically important 6.4 per dollar level. On Friday, the PBOC set the midpoint rate of the Chinese Yuan at 6.3858 per dollar - the highest rate since May 2018.
The pace of appreciation slowed slightly after Chinese regulators expressed their concerns over the strong one-way bets. Due to China's rapid economic recovery after the pandemic-induced slump last year and the sustained weakness in the U.S. dollar, investors have been placing larger bets on the further strengthening of the Chinese currency.
Bets on the growing Yuan also surged after the PBOC appeared to show no concerns with the recent gains. However, state-owned banks have begun to implement measures to temper the currency's gains.
Financial regulators in China said they will be increasing their monitoring of foreign exchange markets to catch market manipulators taking advantage of the rapid appreciation. Regulators warned that the growing yuan exchange rate can't offset the impact of the surging commodity prices.
The PBOC said the stronger currency cannot be used as a tool to stimulate exports. Domestic companies have expressed concerns on how the surging prices of raw materials could add inflationary pressures. Since the start of the year, prices of key commodities such as steel and copper have increased by more than 30%.
"The appreciation of the yuan will squeeze margins at export firms, in particular the medium- and small-sized ones," Sheng said.
The PBOC said in an article published Monday that factors such as policy changes by the U.S. Federal Reserve, the bursting of U.S. asset bubbles, the U.S. economy's rapid recovery and the eventual control of the pandemic could all lead to a massive depreciation of the Yuan in the coming months.
