China tightens controls to curb currency rise

BEIJING (AP) – China’s central bank is trying to curb the yuan’s rise after the currency hit a 2.5-year high against the dollar.

Commercial banks were ordered Thursday to increase for the second time this year the amount of their foreign currency deposits held in reserve. This reduces the amount available for trade, making it easier for Beijing to manage the exchange rate.

The People’s Bank of China is trying to make the state-set yuan exchange rate more flexible and market-oriented, but intervened over the past year to curb its rise. These controls are an irritant in relations with Washington, which complains that a weak yuan is making China’s exports unduly cheap and inflating its multibillion-dollar trade surplus.

The yuan has gained a modest 2% against the dollar since mid-August, but that was enough to bring it to 6.3762 per dollar this week, its highest level since May 2018. That makes a one yuan. value of about 15.7 cents.

Thursday’s order brought banks‘ currency reserves to 9% of deposits from 7%. It was raised to that level from 5% in May, the first change since 2007. Economists then said it had blocked around $ 20 billion in foreign currency.

The ruling Communist Party declared in 2015 that the yuan would become a “freely tradable and freely usable currency” last year. But he kept controls in place amid concerns about exchange rate fluctuations and the flow of money into and out of the world’s second-largest economy.

A rising yuan threatens to make Chinese exports more expensive abroad, hampering a recovery in manufacturing after last year’s slump. A stronger yuan would make imported oil, iron ore and other raw materials cheaper for Chinese manufacturers.

In 2017, the central bank tightened controls on trade to stop a decline in the value of the yuan after a change in the mechanism used to fix the exchange rate triggered a wave of selling.

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