China’s Yuan Is ‘Incredibly Weak’ for Fair Trade, Setser Says

Brad Setser, a Senior Fellow at the Council on Foreign Relations and former US Treasury official, argues China's yuan remains "incredibly weak" and should strengthen by approximately 15% on a trade-weighted basis, well beyond 7 per dollar, to foster fair trade. This assessment, despite recent People's Bank of China adjustments, highlights persistent international pressure for Beijing to allow significant yuan appreciation, impacting global trade dynamics.

Analysis

A hawkish stance on China's currency policy is being articulated by Brad Setser, a former US Treasury official, who characterizes the yuan as "incredibly weak" despite recent modest strengthening by the People's Bank of China. The core of his argument is that a significant appreciation is necessary to establish fair trade conditions. Specifically, Setser advocates for a roughly 15% rise in the yuan on a trade-weighted basis to compensate for its depreciation over recent years, suggesting a move well beyond the key psychological level of 7 per dollar. This perspective signals persistent international pressure on Beijing regarding its monetary policy and has direct implications for global trade balances, suggesting that current exchange rates are viewed as a source of significant economic distortion.

Key Decisions for Investors

• FX traders should monitor for an increase in official US rhetoric pressuring for yuan appreciation, as this could signal a long-term bullish catalyst for the CNH and CNY.
• Investors in Chinese export-oriented sectors must evaluate the potential for margin compression, as a 15% currency appreciation would significantly increase the cost of their goods in foreign markets.
• Given the call for a substantial currency revaluation, it is prudent to review unhedged yuan exposure across portfolios and consider strategies to mitigate potential volatility stemming from any future policy shifts.