The yuan is closing out its strongest quarter against the dollar in more than a decade, boosted by optimism over China’s economic outlook and by the country’s comparatively high interest rates.
From the start of July through Friday’s close, the yuan has strengthened 3.7% against the dollar. That puts the yuan on track for its biggest quarterly gain since early 2008, FactSet data shows. The only other bigger quarterly gains on record are from the 1970s and 1980s, long before China began reforming its currency market in 1994.
China’s resilience, as the first country to suffer from the coronavirus and then bring it under control, has helped, said Jason Brady, president and chief executive of Thornburg Investment Management. “What we do see is a strong Chinese economy, which is part of what’s behind the strong renminbi,” he said, using another name for the currency.
Having returned to work, China is doing brisk business abroad. It reported stronger-than-expected growth in exports for August and a widening trade surplus with the U.S. Greater demand for China’s goods also increases demand for its currency.
This month the yuan rallied below 6.8 a dollar to hit its strongest levels since May 2019. It stood at close to 6.82 a dollar on Monday.
Meanwhile, Mr. Brady said he expected the dollar to stay broadly weak as the U.S. seeks to revive its economy with the help of ultralow interest rates, and with fiscal measures.
China’s central bank has been less dovish than major counterparts, and hasn’t cut any of its key policy rates since May. That has helped widen the gap between returns available on Chinese assets such as sovereign bonds, and those in other large economies.
With the yield on Chinese 10-year government bonds above 3%, the yield advantage over U.S. Treasurys has hit record highs above 2.4 percentage points, according to FactSet.
Jim Veneau, head of Asian fixed income at AXA Investment Managers, said investors holding yuan bonds in a global portfolio could benefit from the wide gap in nominal yields, as well as foreign-exchange gains, while their buying would help boost the currency.
A steady stream of foreign money into Chinese markets in recent years has been spurred partly by China’s inclusion in various influential stock and bond indexes. On Thursday, FTSE Russell decided to add China to its flagship global government-bond index, following similar moves by
& Co. and Bloomberg LP.
estimates annual inflows of $80 billion to $120 billion into China’s government bonds until 2030, while more than $100 billion a year will flow into Chinese stocks.
It and several other banks, including
Group Inc. and HSBC Holdings PLC, have revised their yuan forecasts in favor of a stronger currency. More broadly, however, analysts are divided on whether the yuan will rally more and by how much. The consensus is that any further gains won’t be at the same rapid pace.
A survey of 14 economists and strategists by The Wall Street Journal found the most bullish, at Goldman Sachs and at
United Overseas Bank,
saw it reaching 6.5 a dollar within a year or so, while the most bearish bank, Daiwa Capital Markets, expected it to be at 7.6 a dollar at the end of 2020. Other forecasts for this and next year ranged between 6.55 and 7.05 a dollar.
“Things are going back to normal for China. This bodes well for investor confidence,” said Suan Teck Kin, an economist at UOB in Singapore.
Mr. Suan said a rebound in growth had led foreign investors to pump money into both bonds and shares. He sees the yuan at 6.7 a dollar by year-end and 6.5 in the second half of 2020.
Since 2018, the yuan has been buffeted by waxing and waning trade tensions. It rallied as the U.S. and China struck a partial trade deal early this year, only to weaken again as frictions flared and China’s economy contracted, before beginning its most recent rally in late May.
Still, the yuan has swung far less this year than freely traded currencies like the Australian dollar or British pound. Beijing maintains a tight grip on the currency through capital controls, intervention via state banks, and through the narrow daily range that it sets for onshore trading.
A weaker currency can help make Chinese goods more competitive abroad, offsetting the impact of tariffs, while a stronger one helps deflect charges of currency manipulation.
The recent rally has been a mixed blessing for corporate China: It has benefited airlines and other major importers of raw materials, such as paper makers, as well as firms with heavy dollar-denominated debts, such as property developers. But it has been bad news for exporters since it makes their prices less competitive versus global peers.
Mr. Suan at UOB said China’s exporters would get little help from the authorities but this could encourage them to compete by making more sophisticated products, rather than on price. “This is one way to push the companies up the value chain,” he said.
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