Chinese yuan hit near six-year high against basket currencies

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China’s yuan hit a near six-year high against a basket of currencies. The trade-weighted CFETS RMB Index, which tracks the yuan against 24 other currencies, hit 101.88 on Thursday, the highest level since Dec. 9, 2015 and up 7.42% year-to-date.

The People’s Bank of China (PBOC) set the yuan’s daily fixing at 6.3803 per dollar on the day, 132 pips or 0.2% firmer than the previous fix of 6.3935, the strongest level since June 2.

Xie Yaxuan, chief macro analyst at China Merchants Securities, said a stronger yuan was generally more positive for China’s economic growth and could help offset inflationary pressure.”Against the backdrop of the positive impact from the yuan appreciation, I suggest maintaining a cautiously optimistic attitude towards the yuan rally,” he said in a note.

Traders believe the PBOC is unlikely to be too worried about this round of yuan appreciation. “Some appreciation is not going to hurt the broad economy much, as long as the pace of rally is still under control and without triggering strong rising expectations,” said a trader at a Chinese bank.

Analysts say that China’s strong exports have been supporting the currency.

Shipments rose 27.1% in dollar terms last month from a year earlier to $300.2 billion, marking the 13th straight month of double-digit growth. Trade surplus reached nearly $85 billion in October, a new record high, while the trade surplus for the first ten months exceeded $510 billion, approach the full-year level in 2020.

“Since last year, the strong growth in exports have brought a large amount of foreign exchanges to banks,” said a FX trader at a Chinese bank. “Every time when the yuan shows weakness, there are banks selling foreign exchanges. It’s difficult for the yuan to depreciate.”

“Corporate demand for foreign exchanges remains weak,” said a foreign exchange trader at a Chinese brokerage. “Exports have been strong, imports were relatively weak, and meanwhile, foreign exchange demand from overseas acquisitions has been shrinking significantly since last year.”

Although the US dollar Index has been climbing as the US economy recovers and the Federal Reserve moves to cut asset purchases, the yuan remained strong and the currency is basically staging an independent trend, said Wang Youxin, senior researcher at Bank of China.

“The PBOC was very restrained in monetary easing when stimulating the economy after the Covid-19 pandemic, while the Federal Reserve has been reluctant to normalize monetary policy. Short-end interest rates in the two countries haven’t fully moved in response to respective economic recovery, said Xu Xiaoqing, macro strategist at DH Fund Management.

If excluding core inflation, China’s real interest rates remain high, while real interest rates in the US are still quite low, leaving the spread wide and supporting the yuan’s exchange rate,” Xu said.

Latest data showed that China is still seeing capital inflows. According to the China Securities Depository and Clearing Corporation Ltd, by the end of October, overseas investors’ holdings of Chinese yuan-denominated bonds reached 3.52 trillion yuan, marking the highest level this year and rising by 22.6 billion yuan from the end of September. Year to data, overseas investors’ holdings have increased by more than 15%, showed the data.

“The US dollar is strengthening, but the yuan is not weakening. That’s why the CFETS RMB index is climbing,” said Xie.

Going forward, the index is expected to stay above 100 in the fourth quarter, and “in early 2022, seasonal fluctuations in foreign trade and further strengthening of the US dollar may bring some new changes.”

The spread between economic growth in China and the US is expected to narrow in 2022, which may bring some depreciation pressure to the yuan, wrote Zhong Zhengsheng, chief economist at Ping An Securities.