Many factors are at work to push the yuan higher, but its climb has been sluggish
By Mike Bird
PHOTO: PAUL YEUNG/BLOOMBERG NEWS
China’s August exports were up 9.5% from a year earlier, beating expectations, while import numbers declined. That prompts a nagging question in currency markets: With a widening trade surplus, why isn’t the Chinese yuan rising more?
It’s true that at 6.83 to the dollar the currency is at its strongest level in over a year, but that mostly reflects a weaker greenback, not a stronger yuan. The ICE Dollar Index, which tracks the dollar’s value against a basket of currencies, is down more steeply this year and this quarter than the dollar is against the yuan specifically.
The yields on China’s 10-year government bonds exceed those on their U.S. equivalents by 2.4 percentage points, a larger gap than in the aftermath of the global financial crisis, making the yuan-denominated debt an attractive investment opportunity.
The gap speaks to the relative austerity of Beijing’s response to the pandemic: The year on-year-growth in China’s money supply lags behind those of the U.S., the U.K., the eurozone and Japan.
The inability of the vast majority of would-be Chinese tourists to leave the country is an advantage too, since China is a net importer of tourism services: Its residents spend more abroad than visitors spend in China.
Though the reliability of official Chinese data is partial, there is little sign the government is intervening in the currency market to suppress the yuan’s value. Foreign-exchange reserve figures ticked up slightly in July, but have been largely quiescent. Alternative measures of intervention haven’t indicated any major activity, though it can’t be entirely ruled out.
So why isn’t the yuan stronger? Goldman Sachs analysts offer at least one good reason: Currency settlement data suggests that only 32% of the net proceeds of July’s goods trade was repatriated, meaning less impact on currency markets.
Though foreign holdings of Chinese government bonds have risen, the increase this year is minor and tentative in the grand scheme of global capital flows: a little more than $40 billion, equivalent to roughly two thirds of August’s trade surplus in goods.
Other news on Monday offered an insight into one less quantifiable factor that may be holding the yuan back. The U.S. is weighing import controls against China’s largest chip maker, Semiconductor Manufacturing International —a fresh symbol of trans-Pacific turmoil, heaping additional risk on the ownership of Chinese assets.
Even with a trade surplus, fewer tourists exchanging yuan to travel overseas, and an advantage in yields, the now-constant threat of commercial Cold War will hang over Chinese assets. And with that in place, the currency will likely continue to be weaker than other fundamentals might warrant.
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