Wednesday, January 26

China’s export boom means the yuan’s year-long rally is far from over

The yuan has defied a number of risks to top the ranking of Asian currencies so far this year. There is little sign that he will soon be dethroned.

Rising exports, rising bond inflows and attractive carry trade yields are arguments in favor of higher gains in the Chinese currency. The odds of a reversal are slim, as the price of a reduction in US stimulus has been discounted, while the fallout from the China Evergrande Group debt crisis can be contained.

“China’s export boom will continue into the first quarter of 2022, maintaining the nation’s large trade surplus,” said Scotiabank currency strategist Qi Gao. The currency could rise to 6.20 per dollar, a level it last reached before its devaluation in 2015, if there is more progress in the talks between the United States and China, he added.

Goldman Sachs Group Inc. says the yuan may rise to 6.15 in a year if there is a “significant” relaxation in US trade frictions and a clearer downward movement of the dollar. But China’s state media have tried to temper optimism, noting on Wednesday that the currency’s recent rally is unlikely to alter the trend of its two-way moves.

Overall, a stronger yuan is likely to spur more inflows and further increase demand for the currency, supporting Beijing’s push to promote its use globally. However, it also runs the risk of undermining China’s export competitiveness in the long term.

Here are four charts to illustrate why the yuan is more likely to prolong its rise:

China’s exports have remained strong even as other indicators point to a moderation in the growth of the world’s second-largest economy. Shipments soared to a new monthly record in September due to strong demand ahead of the year-end holidays. China’s commercial banks bought 173.7 billion yuan ($ 27.2 billion) of local currency for their customers in September, suggesting that mainland individuals and businesses prefer to hold onto the yuan over foreign exchange.

A Bloomberg index that tracks the yuan’s movement against 24 pairs has advanced to its highest level since 2016, reflecting the resistance of the Chinese currency against a stronger dollar. Among emerging Asian currencies, the yuan has strengthened the most against the Thai baht and the South Korean won this year, rising around 12% and 9%, respectively.

Foreign purchases of Chinese government bonds rose to an eight-month high in September, and the purchase may accelerate when FTSE Russell adds the notes to its flagship index of world government bonds in October. UBS Group AG estimates that inclusion will generate an average of $ 3.6 billion in monthly entries. Another positive is the sizeable yield spread between 10-year yuan-denominated debt and similarly maturing US Treasuries, which Maybank Kim Eng Securities Pte expects to remain decent despite some reduction in the next few months.

The yuan has delivered the best carry-trade returns on a risk-adjusted basis among Asian currencies this year, according to data compiled by Bloomberg. That is unlikely to change given the low volatility of the yuan, and officials predict the currency will remain largely stable. The normalization of Federal Reserve policy will not disrupt the stable momentum of the yuan and China’s balance of payments position, Wang Chunying, a spokesman for the State Administration of Foreign Exchange, said Oct. 22.

© 2021 Bloomberg

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