(C) Markets Insaider
BEIJING — The Chinese yuan is approaching a critical psychological threshold as it hits a 15-month high against the U.S. dollar, driven by a weakening greenback and a strategic shift in Beijing’s economic priorities toward domestic revitalization.
On the Shanghai foreign exchange market on the 24th, the yuan closed at 7.0166 per dollar, a 0.17% drop from the previous session (signaling currency appreciation). This marks the strongest level for the renminbi since September 27 of last year. The yuan has surged approximately 3.71% against the dollar this year, with the pace of appreciation accelerating sharply in the second half.
Strategic Shift Toward "Internal Circulation"
Financial analysts point to a confluence of factors: the U.S. Federal Reserve’s pivot toward interest rate cuts, easing trade tensions, and robust capital inflows into Chinese equities. However, the most decisive factor is the Chinese government's apparent tolerance—and even encouragement—of a stronger yuan to support its 2025 agenda of boosting domestic demand.
While a stronger currency typically hampers price competitiveness for exporters, it serves Beijing’s broader goal of lowering the cost of imported raw materials and energy. By increasing the purchasing power of Chinese consumers and enterprises, the government aims to transition from an export-led model to a consumption-driven "Internal Circulation" economy. Furthermore, a stable, appreciating yuan is seen as a prerequisite for the currency’s long-term internationalization, enhancing its appeal as a global reserve asset.
Global Banks Forecast Further Gains
Wall Street giants and European financial institutions are increasingly bullish on the yuan’s trajectory. Goldman Sachs recently argued that the yuan remains undervalued by approximately 25% relative to China’s economic fundamentals. With China on track to record a historic trade surplus this year, the pressure to allow currency appreciation is also a tactical move to blunt international criticism regarding trade imbalances.
Price targets for the end of 2025 vary but lean heavily toward continued strength:
Bank of America & Goldman Sachs: 6.8 yuan per dollar
Deutsche Bank: 6.7 yuan per dollar
Eurizon SLJ Capital: 6.25 yuan per dollar
Implications for Regional Markets
The yuan’s ascent is expected to provide a tailwind for other emerging market currencies, particularly the South Korean won. Given the historical "coupling" between the two currencies, a stronger yuan could alleviate downward pressure on the won, providing relief for South Korea’s import-heavy industries.
However, risks remain. Should the "7-per-dollar" floor collapse decisively in early 2025, it may trigger a rapid unwinding of dollar-long positions by Chinese exporters who have been hoarding foreign currency, potentially leading to a volatile, one-sided appreciation that Beijing might eventually move to stabilize.
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