China won't weaken the yuan because it may backfire
Oct 22 (Reuters) -China's yuan is rising in relative terms, despite the broadly stronger USD. While that gives Beijing roomto weaken it for a trade advantage, this seems unlikely as weaponizing the yuan could easily backfire.
The trade-weighted renminbi index has reached itshighest since July 11, while the dollar index =USD is near athree-month peak. The yuan's relative strength has materialized even without supportive intervention; in fact, authorities were trying to stop it from appreciating too fast in September.
While scepticism lingersas to whether Beijing's recent swatheof stimulus measures can achieve thedesired effect, the market has given it some benefit of the doubt. Goldman Sachs upgraded its 2024 GDP forecast to 4.9% from 4.7%, while UBS on Monday followed suit with a 0.2 percentage-point increaseto 4.8%.
China's FX regulator on Tuesday said the yuan is at a reasonable level, and foreign portfolioinflows have resumed. The central bank has set the daily USD/CNY benchmark very near marketforecasts since August.
The rising geopolitical stakes may tempt some to bet against the yuan, on the potential for a devaluation to offset impending U.S. tariff hikes should Donald Trump win the Novemberelection.
But that could backfire since meddling with the yuan would dent foreign investor confidence, just as some are wading back into Chinese equities. Thestock market rally, which has recently fizzled, may be a key aspect of reviving China's growth potential.
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Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai
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