China's foreign-exchange reserves edged higher in August against the backdrop of a weaker dollar and a surging trade surplus, renewing concerns about the yuan's appreciation.
China's foreign-exchange reserves rose by $19.55 billion to $3.438 trillion in August, according to data released Monday by the People's Bank of China. The result was higher than the $3.425 trillion expected by economists surveyed by The Wall Street Journal.
Monday's data came as policymakers worldwide weighed actions against inexpensive Chinese exports they say benefit from unfair government subsidies. Concerns about domestic deindustrialization have prompted some countries to consider extra trade barriers and pressure Beijing to allow the yuan to appreciate. The currency is widely considered undervalued.
A Group of 20 statement issued earlier this month, and backed by every member except China, implicitly called out Beijing's reliance on exports for growth, putting the spotlight back on the yuan. A cheap currency boosts the already formidable competitiveness of Chinese exports.
In recent months, German Chancellor Friedrich Merz has been pushing for a dialogue with Beijing over concerns that China may be maintaining an artificially weak currency to gain an advantage in global trade. He claimed in June that the yuan was undervalued by roughly 30%.
Despite the global discontent, economists say Chinese authorities are unlikely to allow fast currency appreciation due to the potential for negative side effects.
A rapid strengthening of the yuan would erode China's international competitiveness, slowing exports and economic growth, said economists at Goldman Sachs.
"But a moderate pace of appreciation--perhaps 3-5% a year against the dollar--would not impede ongoing market share gains," they said in a recent note.
Permitting the yuan to appreciate nominally against the dollar might also be viewed as a sort of olive branch that could defuse the risk of a unified tariff pushback. It could also help bolster Beijing's efforts to make the yuan a more internationally used currency within the dollar-dominated global financial system, GS said.
Even if Beijing allows faster appreciation of the tightly-controlled currency, that alone won't be enough to curb China's ballooning trade surplus.
For one thing, the country's gravity-defying exports are built on a strong base of manufacturing and technological capacity, and can't be attributed simply to an undervalued currency, economists say.
Another argument against letting the yuan strengthen too much is the impact it would have on already-weak domestic demand.
For economists at Morgan Stanley, yuan weakness is a result of China's new economic reality after the property-sector bust, depressing investment and consumer sentiment.
Removing a major source of investment demand in property infrastructure while saving rates stayed high translated into a larger current-account surplus and a weaker currency
"Engineering a sharp appreciation shock would treat the symptom rather than the underlying imbalance," MS economists said in a note earlier this month.
A better policy option for Beijing if it wanted to allowed faster currency appreciation would be to bundle that with measures to boost domestic consumption.
"The more durable adjustment would be to reduce the saving-investment imbalance by lifting household income, strengthening the social safety net and shifting fiscal support toward consumption and public services, while allowing the property correction and excess capacity to work through," MS said.