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Sixth Month Streak: China’s Yuan Rises Again

China’s Yuan
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EDITOR NOTE: What do you think will happen to US-China trade relations when Biden takes office in 2021? According to South China Morning Post, there won’t be much of a change. Tensions remain high, currency manipulation issues remain a concern. Over the last six months, the yuan has been rising against the dollar, and is posed for further gains, welcoming the new administration. Unlike the US, China’s economy is rebounding. Unlike the US, China seems to have put a lid on COVID, in a manner not entirely dependent on a vaccine. The yuan’s rise is as much a testament to China’s formidable economic power as it is a prelude to America’s waning dominance. It doesn’t have to be this way, but avoiding this fate would require a Great Reset in the way we Americans think about a lot of things. 

The yuan’s exchange rate rose against the US dollar in November for the sixth straight month – its longest appreciation streak in six years, reflecting Beijing’s determination to boost the yuan’s international demand while also bracing for the incoming administration of US president-elect Joe Biden.

The yuan is set for a gain of 1.6 per cent against the US dollar in November. The extended appreciation stretch is the yuan’s longest since the six-month period from May to October 2014. So far this year, the yuan has risen 5.7 per cent against the US dollar and has been the best performer among the 11 most highly traded Asian currencies, according to Bloomberg.

Analysts said the yuan’s rising strength is a sign of how increasingly important it is for Beijing to promote international use of the yuan and relax restrictions to boost foreign investments in yuan-denominated assets and in its economy in the face of the threat of Chinese entities being cut off from access to American investment and the US dollar-based financial system.

“There are lots of benefits for China from a stronger currency, in terms of encouraging its [global] use,” said Ray Farris, chief investment officer for South Asia at investment bank Credit Suisse. “It should provide China with some degree of insulation from the risk of US sanctions.”

Global investors’ confidence in purchases of yuan-denominated assets is due in good part to China’s strong economic recovery from the economic shock caused by the coronavirus outbreak in the spring, while other countries are still mired in fresh lockdowns to control the virus spread. China is expected to be the only Group of 20 country to record positive growth this year.

In addition, China has taken steps to further open up its domestic markets to attract foreign investment.

New data released on Monday underscores the strength of the nation’s economic rebound.

The manufacturing and non-manufacturing purchasing managers’ indices (PMIs), which measure economic sentiment in the world’s second-largest economy, rose in November for the ninth month in a row.

The official manufacturing PMI reading was the highest since September 2017, while the non-manufacturing PMI was the highest reading since June 2012.

In addition, industrial profits jumped 28.2 per cent in October from a year earlier – the sharpest increase since March 2012 – due to a rebound in industrial activity, stronger exports and a recovery in consumer spending.

Expectations of continued yuan appreciation have helped boost capital inflows into China’s bond and equity markets, becoming a key driver of yuan internationalisation in recent years, said Kelvin Lau, senior economist for Greater China at Standard Chartered Bank.

The growth rate of foreign holdings of yuan-denominated assets accelerated further in the third quarter, rising at an average monthly pace of 37 per cent from a year earlier, up from 25 per cent in the second quarter, to 7.9 trillion yuan (US$1.2 trillion) across equities, bonds, loans and deposits, Lau said.

“All of this reflects global investors’ continued interest in diversification as China continues to open up its financial markets,” Lau said. “This has been further supported by the reduced political uncertainty following Biden’s win and improving vaccine prospects.”

But the overarching nature of the conflict between the United States and China is expected to remain the same under Biden in the areas of currency manipulation, trade practises, state subsidies, intellectual property protection and forced technology transfers, according to analysts.

The Trump administration is hardening its position against China in the final weeks before Biden takes office on January 20, making it more difficult politically for him to reverse the measures amid strong bipartisan anti-China sentiment in the US Congress, even though overall trade tensions between America and China could improve under Biden, analysts said.

The US is poised to add top Chinese chip maker SMIC and national offshore oil and gas producer CNOOC to a blacklist of Chinese companies with alleged military ties, requiring US companies to obtain a special government license to do business with them, Reuters reported on Monday. The addition of SMIC and CNOOC would bring the number of Chinese companies on the blacklist to 33.
“The trade war that characterised much of last year could turn into a capital war,” said John Woods, chief investment officer for Asia Pacific at Credit Suisse. “Issues like capital, like technology, will remain current risks that we need to be aware of.”

At the same time, there is still the potential for the incoming Biden administration to use currency as a policy weapon by pivoting towards a weaker US dollar policy that would push up the yuan to a level that would hurt China’s economy and thus help maintain the US dollar’s supremacy in the long run, said Michael Howell, a cross-asset liquidity strategist at CrossBorder Capital, according to online research firm Smartkarma.

The US unit’s key role as an invoicing and funding currency often makes a moderate devaluation attractive to users because the value of the US dollar can be independent of its international use. Thus, the value of the US dollar frequently moves in a direction opposite to the world business cycle, Howell said.

“It makes geopolitical sense for America to undermine the yuan by forcing it higher to uneconomic levels,” Howell said. “We foresee the dollar both retaining and probably increasing its international presence compared with the fledgling yuan, but at the same time depreciating in value.”

Over the weekend, China charged that a preliminary US Commerce Department ruling – that China had provided a trade subsidy to some exporters of twist ties by undervaluing the yuan – violated international rules.

China’s Commerce Ministry called on US authorities to stop their investigation, while also disputing the preliminary finding that Chinese producers got an unfair advantage because of the then-weaker currency.

The US ruled that cable-tie exporters from China received an unfair subsidy due to China’s undervalued currency and instructed American customs agents to collect cash deposits of preliminary countervailing duties from importers of twist ties from China. The claim by the US was that the yuan’s exchange rate against the dollar was undervalued by 5 per cent in 2019 – the period at the heart of the complaint by US competitors.

“The move seriously violated relevant international rules,” China’s Commerce Ministry said in a statement on its website on Saturday, citing an unidentified official. “We hope the US Department of Commerce will fully consider the evidence and counter opinions submitted by the Chinese side and correct the relevant wrong practises and conclusions.”

Originally posted on SCMP

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