While China still keeps an iron grip on its exchange rate, 2017 has thus far brought a reversal of a three-year stretch in which the dollar weakened against the yuan, also known as the renminbi or by its trading symbol RMB.
Some of the Chinese currency's strength stems from appreciation in major currencies like the euro and yen against the dollar, putting upward pressure on the yuan on a trade-weighted basis. But the gains versus the dollar show a willingness on the part of China to cede a marginal advantage to the U.S., its biggest single destination for exports.
"We do expect that the RMB should continue to gradually strengthen versus the weakening dollar over the next few years," said Jan Dehn, head of research at London-based Ashmore, which specializes in emerging-market stocks and bonds.
The exchange-rate reversal comes amid increased tensions between Trump and Xi, who has taken steps to improve his country's standing as a powerhouse in international trade even as the U.S. president pledges to renegotiate trade deals he considers unfair -- in order to protect American manufacturers and workers.
Greece couldn’t get a deal on debt restructuring until after the German election so that Merkel could further cement her place as the nation’s longest serving Chancellor. The rush to get deals done with Cuba and Iran in the last 18 months of Obama’s administration were equally aimed at legacy building. It’s plain for anyone to see that politicians care about their legacy and go to rather extreme lengths to get the headlines they want. Why should China be any different.
Xi Jinping has a once in a generation opportunity to put his people in major positions of power when the Party Congress convenes later this year. Depending on whether the rules are bent so Wang Qishan can avoid mandatory age-related retirement, there could be five of the seven seats on the Standing Committee that need to be filled. 40% of the Politburo’s 25 members are retiring. Ensuring the “right people” get into influential positions is Xi’s number one priority right now. If successful it will ensure his legacy lives on well after his own tenure ends. If history is any guide politicians seldom have a greater priority.
The strength of the currency, the stability of the stock market, the relative strength of the banking sector, the plugging of holes in the Great Firewall, the banning of Winnie the Pooh, strident attitudes towards the border with India, oil drilling by Vietnam in the South China Sea and brinksmanship with North Korea can all be viewed through the same lens. What will ensure Xi’s legacy?