BNY’s Geoff Yu argues that current CNY strength has strategic value as China boosts imports of semiconductors from Japan, South Korea and Taiwan. He notes that renminbi gains versus NA-3 (JPY, KRW ve TWD), USD and EUR weaken any U.S./EU case on Chinese currency undervaluation. The report highlights large NA-3 trade surpluses and ongoing recycling flows supporting these misalignments.

Strategic strength versus NA-3

"Current exchange rate misalignments are both exacerbating imbalances and making any case by the U.S. and EU against China’s practices much weaker. In mid-June, German Chancellor Friedrich Merz called for a new Plaza Accord to help address the EU’s trade deficit with China, implying that it was 30% undervalued. Yet in nominal terms, the renminbi has strengthened against the USD, EUR and NA-3 currencies year to date, including close to 11% against the KRW."

"We believe the bigger surprise is why China is letting the renminbi strengthen aggressively in nominal terms. Weak inflation is clearly limiting real effective exchange rate (REER) appreciation, but even so, the moves are hardly conducive to reflation efforts. Beijing has also been relatively silent on such matters."

"Our call this year has been for REER gains in CNY, but more through inflation differentials rather than the nominal. Reality has been the opposite."

"We see a clear strategic reason behind the tolerance for CNY strength. Official data show that imports from Japan, South Korea and Taiwan have surged, with demand for semiconductors the clear driver. Using the Harmonized System for trade classification, total imports from the three jurisdictions in the category (HS 85), which encompasses semiconductors, surged to over CNY 300bn in May alone, a near 60% y/y increase."

"We expect the renminbi to arrest its gains versus NA-3 currencies once these pressures ease, and there may be a strong case for CNY to weaken when China’s own production is ready to challenge current dominant exporters."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)