Friday, May 14, 2021

Chinese currency enters the Biden era on foot

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After years in Donald Trump’s sights, the Chinese currency welcomes Joe Biden on radically different terms.

The renminbi, currently at 30 months highh against the dollar, was boosted by expectations that a Democratic administration could prove to be less volatile in its relations with China as well as by the country’s strong economic recovery after the Covid-19 pandemic.

But investors are divided on whether the wind will stay in the renminbi’s sails in 2021, much depending on the trajectory of the renminbi. US-Chinese relations and Beijing’s political priorities.

Economists’ forecasts for the Chinese currency this year vary widely, from a drop of 7.2% to a rise of 6.6% against the dollar. The median forecast, according to analysts polled by Bloomberg, calls for a rise of 2% to 6.4 Rmb to the dollar.

Here are the factors that will determine China’s exchange rate this year.

Will Biden seek to reestablish ties with China?

The Chinese currency marked its the best six months on record in the second half of 2020, investors betting that Mr. Biden would overthrow Mr. Trump, whose tariffs on Chinese goods hit the renminbi.

“The Biden administration is likely to be much more balanced in its approach” to China, said Mansoor Mohi-uddin, chief economist at the Bank of Singapore.

But greater renminbi strength would require more positive developments in US-China relations, he added, such as the removal of tariffs imposed by the Trump administration, which at one point designated Beijing as a currency manipulator.

Analysts are skeptical of a total tariff cut, while Mr. Trump has packed his last days in office with a burst of measurements targeting Chinese companies.

Janet Yellen, Mr Biden’s candidate for Secretary of the Treasury, told the Senate during its confirmation hearing this week that the new administration would “tackle China’s abusive, unfair and illegal practices” and was prepared to use “the full range of tools” to address them.

“Is Biden going to reverse them imminently?” Or will he fear that reversing them will give the impression that he has a softer stance on China? Asked Michelle Lam, Greater China economist at Societe Generale, of US sanctions. “It is still too early to say anything for sure.”

Will the falling dollar stimulate demand for Chinese assets?

The path of the dollar and how it affects global demand for Chinese assets, analysts say, is a major factor in strengthening the renminbi.

With Democrats taking control of the Senate, Mr Biden will have a better chance of getting started nearly $ 2 billion in fiscal stimulus, which could accelerate inflation and weigh on the dollar.

“To a large extent, the strength of the renminbi that you are seeing right now is a reflection of the weakness of the dollar. . . now the question is whether we are going to see this weakness spread further, ”said Ms Lam of SocGen.

A weaker dollar, combined with expectations that the Federal Reserve will keep interest rates extremely low, it is relatively more attractive for investors to hold renminbi-denominated assets.

Line graph of 10-year government bond yields (%) showing the yield advantage of Chinese bonds stimulates demand for renminbi

Goldman Sachs analyst Danny Suwanapruti predicted global influx China’s renminbi-denominated onshore debt market will reach $ 140 billion in 2021, up from around $ 130 billion last year.

Monthly inflows on onshore debt will average $ 5-10 billion this year, he suggested. The pace could accelerate to $ 10-15 billion from October, when Chinese government bonds will be incorporated in the influential FTSE Russell World Government Bond Index.

This will help support strong foreign demand for the renminbi, he believes. Goldman Sachs believes the Chinese currency will strengthen to 6.2 Rmb per dollar by the end of the year.

“Chinese fixed income markets will dominate [flows into emerging markets] in 2021, as they did in 2020, ”said Mr. Suwanapruti.

What are Beijing’s political priorities?

China has been more restrained than the United States in its budgetary response to the coronavirus pandemic. Swift and severe lockdowns helped bring the virus under control and made China the only big saving to avoid a recession in 2020.

This means that China could now focus on containing financial risks, which have been highlighted by a series of high profile defaults at the end of 2020, even if the control weighed on growth.

“The priority for policymakers is to contain leverage and focus on debt sustainability, as the economy has almost normalized already,” said Ms. Lam of SocGen.

While that doesn’t necessarily mean that China’s central bank will push interest rates higher this year, analysts believe they will likely stay well above their ultra-low counterparts in the US and Europe, supporting the strength of the renminbi.

Linear chart of the renminbi to the dollar showing the uncertain trajectory of the Chinese currency in 2021

There is also the question of Beijing’s comfort level with a stronger renminbi, the value of which is partly guided by policymakers.

While China has strayed far from actively managing the currency in recent years, it still sets a daily fix against the dollar, against which it can strengthen or weaken by up to 2%.

However, analysts believe that the People’s Bank of China maintain a practical approach to the management of the currency, with any pressure on exporters due to its strength unlikely to elicit intervention.

Becky Liu, head of macroeconomic strategy for China at Standard Chartered, said that an economic rebound in developed market economies with the distribution of Covid-19 vaccines would mean that “the demand for Chinese products could remain strong even longer. provided that”.

The country’s monthly trade surplus has reached its the highest level ever in December on the huge global demand for medical products. “The renminbi’s appreciation has not come to an end,” added Ms. Liu, who believes the currency will rise to Rmb6.3 per dollar by the end of the first half of the year.

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