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Macroscope | Two reasons the outlook for China’s currency remains bright
- Demand for Chinese debt will be enhanced with its inclusion in FTSE Russell’s flagship government bond index, which will underpin demand for the yuan
- Renminbi appreciation might also suit policymakers in Beijing concerned about rising commodity prices
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The outlook for the yuan remains positive. The Chinese economy’s recovery from the coronavirus pandemic continues, demand for renminbi-denominated bonds should pick up in the second half of 2021 and policymakers in Beijing might well conclude that yuan strength provides a reasonable buffer against rising commodity prices.
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Admittedly, this scenario puts a heavy emphasis on the yuan side of the dollar/yuan exchange rate but given that the Federal Reserve seems determined to keep US monetary policy settings ultra accommodative for the moment, investors might be inclined to concentrate more on the renminbi side of that currency equation.
China’s National Bureau of Statistics revealed on Friday that the economy expanded by 18.3 per cent in the first three months of 2021 on an annualised basis. Although that was below the 18.5 per cent median forecast of economists surveyed by Bloomberg, it was the highest quarterly year-on-year growth rate since this data stream was first published in 1993.
It should of course be noted that this eye-catching figure is enhanced by the base effect, given that the onset of the pandemic led to a 6.8 per cent contraction in China’s gross domestic product in the first quarter of 2020. In fact, on a quarter-on-quarter basis, China’s GDP grew by only 0.6 per cent in the first three months of 2021, compared to the final quarter of 2020.
Nevertheless, China looks on course to comfortably achieve officially targeted economic growth of above 6 per cent in 2021 as a whole and, coupled with the fact that China continues to run a healthy current account surplus, this should enhance the attractiveness of the yuan to investors.
That said, it is notable that last month global funds pared holdings of Chinese government bonds for the first time in two years as the yield differential with US Treasuries narrowed.
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