Opinion | China’s yuan rally has just started, and it is thanks to the US Federal Reserve
- China’s 10-year government bond offers a yield of 3.2 per cent against an August consumer price index of 2.4 per cent, resulting in a positive real yield
- In contrast, the US is on track to reach its 2 per cent inflation target when the 10-year US Treasury bond is yielding 0.78 per cent, meaning the interest rate is negative
The yuan’s appreciation against the US dollar in recent days could be a prelude to a long rally for the Chinese currency as it is increasingly being seen as a stable source of value amid unconventional monetary policies by major central banks pushing the global financial system into uncharted territories.
The near zero and sub-zero bond yields offered by governments from rich countries are upending conventional theories of value, forcing investors to scramble to defend the value of their investments.
This is making yuan assets attractive. It is not a coincidence that capital flows into Chinese bonds have picked up since US Federal Reserve chairman Jay Powell said the US is committed to a 2 per cent inflation target when the 10-year US Treasury is offering a yield below 1 per cent, meaning the US Federal Reserve is going to take advantage of US government bond investors.
In comparison, China’s 10-year government bond offers a yield of 3.2 per cent, a relatively decent return given the odds of a Chinese government default is close to zero.
Yes, the yuan is not freely convertible yet, but Beijing is making efforts to make it easier for serious investors – banks and insurers – to bring money into and get money out of China. For reasonable investors who are chasing stability, China is emerging as a darling.
