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The Chinese Yuan Continues to Strengthen Against the U.S. Dollar


Posted: Thursday, November 19th, 2020

Estimated Reading Time: 2 minutes

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One of the main themes of the year in the investment community was the Chinese Yuan’s strength. The Chinese currency is up 9% against the U.S. Dollar since May and rising.

The U.S.-China trade conflict generated much uncertainty during Trump’s presidency. As we got closer to the election and Biden rose in polls, the investing community began anticipating a new administration. With that, the rotation into Chinese assets began.

Chinese Yuan

Why Did the PBOC Not Intervene to Weaken the Chinese Yuan?

Another interesting thing to mention about the Chinese Yuan’s strength is the People’s Bank of China (PBoC) stance. Usually, it would intervene – and it did so in October this year.

More precisely, it made it easier to “short” the renminbi by reducing the reserve requirement for forward FX trading to zero, from 20% prior to the decision. The result? The Chinese Yuan fell about 0.3% against the U.S. dollar before the upward momentum resumed.

China Aims at Reducing Its Dependence on Exports

Because of the negative impact of the trade war with the U.S., China changed its strategy. It aims at reducing its dependency on exports. More precisely, it encourages domestic demand in an effort to stimulate a consumer-based economy.

In doing so, it attracts foreign portfolio investments. A quick look at the inflows into Chinese assets in the last years points to the fact that 2020 just confirms the trend started in the previous years. Foreign holdings of onshore renminbi assets grew exponentially in the years of Trump’s presidency.

Containing the Virus’ Spread

The Chinese economy is one of the few ones in the world to have economic growth in 2020. Because it managed to control the virus’ spread, it started the economic recovery much earlier than other countries.

After the renminbi was included in the Special Drawing Rights (SDR) basket of currencies in 2016, the Chinese Yuan gained internationalization. Nowadays, many investors flee the negative interest fixed-income environment in the developed world in search of yield. Guess what? China’s offer is tempting, and participating one needs to own the Chinese Yuan.

Judging by the trend of foreign holdings of onshore renminbi assets, the years ahead will likely bring something similar. If China wants to cut the dependence on exports (technology, energy, or even food), then the PBoC will let the Chinese Yuan appreciate even more.

The recent announcement of the Regional Comprehensive Economic Partnership (RCEP) led to the creation of the world’s largest trade bloc. Guess who is leading the nation part of the agreement?

China.

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