China’s roaring economy has sparked a yuan rally, but it may not last

Demand for the yuan has spiked on the back of global appetite for China’s goods and renminbi bonds, thanks to its revitalised industrial sector and prudent monetary policy

But in the medium to long term, yuan strength against the dollar will also depend on US macro policies. The outcome of the US election is key

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The US’ and China’s stimulus responses to the pandemic have resulted in a widening of interest rate differentials between the countries that lures foreign capital to renminbi bonds. Photo: Reuters

Published: 4:45pm, 4 Nov 2020Updated: 10:16pm, 4 Nov 2020

China’s third-quarter GDP data provided comfort for investors that its “first in, first out” economy is continuing to lead the global recovery from the coronavirus-induced slump.

Not only did the economy retain a decent amount of momentum from the second quarter’s V-shaped rebound, high-frequency data showed that the recovery had also gained more breath and balance. Sectors which led the recovery – such as industrial production, investment and exports – saw growth largely returning to pre-Covid-19 levels, while the laggards – consumption, service sector activities, and labour market conditions – were catching up with the front runners.

The overall impression is that the economy is now firing on all cylinders, and on track to deliver growth for the year while the rest of the world is still mired in recession.

These positive macro fundamentals have been well reflected in China’s asset markets. A-shares have staged a vigorous rebound since late March and are leading the world in year-to-date performance. Onshore bond yields have also risen back to pre-Covid highs, reflecting the quick economic normalisation and prudent monetary operations achieved by the central bank.

However, what has attracted more attention lately is the rapid appreciation of the renminbi. Since the trough in late May, the yuan has appreciated by over 6 per cent against the US dollar, rising to a 2½-year high, thanks to strong demand from two main channels.

The first is China’s trade activities, where exports and imports create demand and supply for the currency. The balance of these activities is captured by China’s trade surplus with the rest of world, which has risen to a 3½-year high, while its surplus with the US is now the second highest on record.

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