The Chinese yuan (CNY) has been one of the most resilient emerging market currencies in the world since the start of the COVID-19 pandemic in the first quarter of 2020, to the point where it is no exaggeration to consider it as a new candidate for the “G10 club”. according to a report, dated July 15 2021, by Ebury, a European fintech company active in the management of international collections and payments and in risk hedging.
2020 Saw a strong appreciation of the yuan, which gained more than 6% against the US dollar. At the end of May this year, USD / CNY fell below 6.40, its lowest since mid-2018. Since then, the exchange has moved back towards the 6.50 level it was trading at earlier in the year, due to both market sentiment weaker than both dollar strength. Ebury believes much of the yuan’s outperformance in 2020 can be attributed to the Chinese authorities’ ability to control the spread of COVID-19.
China’s initially slow vaccination campaign accelerated at the end of the first quarter and hit a staggering rate of more than 1 dose per 100 people per day in May. To date, 97 doses have been distributed per 100 inhabitants. However, doubts remain regarding the degree of protection provided by the vaccine, compared to the new variants. Efficacy data in some countries using Chinese-made vaccines (mainly Sinovac and Sinopharm) may provide limited protection from infection, particularly against the Delta variant. So far, however, the situation on the COVID-19 front in China – according to data released by the country’s authorities – seems to be under control, especially compared to many other Asian countries that have experienced a strong resurgence of the virus in recent weeks. Although China has historically intervened in the currency market, it seems that the movements we have seen since the start of the crisis have only reflected market sentiment.
The PBoC’s effort to control the currency and ensure a daily change of no more than 2% in the exchange rate makes the CNY one of the volatile emerging currencies. The PBoC has indeed committed to holding the currency at the CFETS RMB index since early 2018. This basket of currencies has been modified to reflect changes in China’s international relations. The most recent change in the basket was the recent declaration of the share of the US dollar (from 26.4% in 2015 to 18.8% in 2021). The second largest weight is assigned to the euro (18.15%), with the remaining two thirds made up of twenty-two other currencies. This index has risen more than 7% since the beginning of 2020, a movement larger than that seen in the major emerging market indices. One of the main factors driving the strength of the yuan in 2020 was the divergence in economic performance between China and almost every other country in the world. Although the Chinese economy suffered its worst performance since 1976 with a growth of 2.3% in 2020, which was still better than expected, China was one of the only nations to record growth. The ability of the Chinese authorities to grant increased cases and more localized benefits have proven very effective for the country’s economy. The Chinese economy has continued to perform quite well in recent months as well. GDP grew by 0.6% quarter-over-quarter in the first quarter of 2021 and more than double in the second (1.3%). Retail sales have remained positive since August, reaching 12.1% in June. Industrial production has been mostly solid over the past couple of months and commercial activity PMIs have remained above the expansion level of 50, although they have declined recently, especially in services.
Throughout the course of the pandemic, the Chinese economy was supported by an accommodative monetary policy and an expansionary fiscal policy. In the most recent meeting, the People’s Bank of China announced the cut in the required reserve ratio for banks by 50 basis points starting July 15. Markets interpreted this move as a sign that China’s economic situation may not be as favorable and may require additional growth support measures.
“We continue to hold a positive view on the yuan. The country’s fundamentals are solid and we think positive sentiment towards emerging currencies and weak US dollar should provide support for the yuan”. Ebury reports. “In addition, we are seeing significant change. among investors who are starting to consider the yuan as a major currency, no longer emerging. We are witnessing a progressive internationalization of the yuan which represents a growing share of world trade and foreign exchange reserves and is increasingly used for invoicing and payments . Payments in local currency are still very little used compared to China’s weight in global trade, suggesting room for growth and further demand for the Chinese currency”.
As the global economy recovers and vaccination campaigns continue, most of the advantages the yuan has over other currencies are likely to be eroded, while the risk of slower growth and the possibility of further policy easing monetary elements provide some element of risk for the currency. China’s international relations also remain at the fore, with the political landscape becoming increasingly complex in recent months.
