BNY's Geoff Yu highlights that the Chinese yuan (CNY) has shown notable strength in 2024, particularly against the Japanese yen (JPY), South Korean won (KRW), and New Taiwan dollar (TWD), as well as the US dollar (USD) and euro (EUR) [1]. This appreciation has strategic significance as China has increased its imports of semiconductors from Japan, South Korea, and Taiwan, with official data indicating that imports in the relevant category (HS 85) surged to over CNY 300 billion in May alone, representing a nearly 60% year-on-year increase [1].
The report notes that these renminbi gains are weakening the case made by the US and EU regarding Chinese currency undervaluation. For example, in mid-June, German Chancellor Friedrich Merz called for a new Plaza Accord to address the EU's trade deficit with China, suggesting the yuan was 30% undervalued. However, the yuan's nominal appreciation year-to-date, including a nearly 11% gain against the KRW, undermines such claims [1].
Despite weak inflation limiting real effective exchange rate (REER) appreciation, the nominal strengthening of the yuan is seen as surprising and not supportive of China's reflation efforts. Beijing has remained relatively silent on the issue, and BNY's call for REER gains in the yuan was expected to come through inflation differentials rather than nominal appreciation, but the opposite has occurred [1].
Looking forward, BNY expects the yuan to halt its gains against NA-3 currencies once the current pressures from semiconductor imports subside. There may be a strong case for the yuan to weaken when China's domestic semiconductor production is ready to compete with current dominant exporters [1].
CONCLUSION
The Chinese yuan's recent strength, driven by surging semiconductor imports, has weakened international claims of currency undervaluation. While the appreciation is seen as strategically motivated, BNY anticipates the trend may reverse as domestic production ramps up, potentially leading to yuan depreciation in the future.