Macroscope | How a likely trade war resolution and the MSCI China weighting boost point to a rise in the yuan
- Beijing may well accept a trade deal that specifically calls for a stronger yuan, while investors will look to buy more of the currency to fund increased holdings of A-shares
Admittedly, the spate of disappointing Chinese economic data cannot be denied. For example, car sales in China fell again in January while purchasing manager index data from China’s National Bureau of Statistics has shown that the economy slowed further in February, with manufacturing activity contracting for a third successive month.
But, while that narrative would not ordinarily be supportive of yuan strength, there are stronger forces at play which should win out.
The Chinese economy still needs capital and investment to fuel growth even as Beijing has reined in the pace of domestic credit creation in support of greater financial stability.
Foreign direct investment can help meet that need, and overseas capital inflows will only be encouraged by the prospect of yuan appreciation. A potential rise in the currency’s value only enhances the attraction of any underlying yuan-denominated investment in China.