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. 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. That narrowing was largely a consequence of optimism that President Joe Biden ’s fiscal stimulus measures would turbocharge the United States’ post-pandemic economic recovery, and therefore, at the longer end of the curve, justify market participants pushing down US Treasury prices, driving up US yields in consequence. But a degree of relative calm has returned to the US bond markets this month. “Never bet against the Fed” is a long-standing mantra in the US bond markets and it remains apparent that it is disinclined to play along with the idea that longer-end Treasury yields should continue higher. With longer-end Treasury yields having come off somewhat, there’s arguably less incentive for investors to switch out of Chinese government bonds into US Treasuries. Coronavirus recovery: is the US economy set for a rerun of the Roaring Twenties? It should also be remembered that demand for Chinese debt will be enhanced now that FTSE Russell has confirmed that, from October and over three years, it will proceed with plans to include Chinese sovereign debt in its flagship government bond index. In light of FTSE Russell’s announcement, US investment bank Goldman Sachs has raised its forecast for inflows into Chinese government debt this year to between US$150 billion and US$180 billion, up from US$120 billion to US$140 billion. This is serious money and it should underpin demand for Chinese debt in the second half of the year as markets pre-position themselves in expectation of post-inclusion portfolio demand for Chinese government paper. That should also underpin demand for the yuan. Renminbi appreciation might also suit policymakers in Beijing who have recently shown concern about commodity prices . “We must keep the basic stability of prices and pay particular attention to the trend of commodities prices,” said China’s Financial Stability and Development Commission, headed by Vice-Premier Liu He, on April 8. Data released a day later showed China’s official producer price index increasing to 4.4 per cent in March year on year, compared to a 1.7 per cent rise in February. China’s consumer price index rose to 0.4 per cent in March on an annualised basis, following February’s minus 0.2 per cent. Beijing will also be aware that the global Food Price Index (FPI), as calculated by the UN Food and Agriculture Organization, averaged 118.5 points in March, 2.4 points (2.1 per cent) higher than in February. That increase was the 10th consecutive monthly rise in the value of the FPI, bringing it to its highest level since June 2014. China needs imported energy and raw materials to power its economy, and imports a lot of food. With commodities generally priced in US dollars, in local terms, a stronger yuan gives a measure of protection against imported inflation when greenback-denominated commodity prices rise. Neal Kimberley is a commentator on macroeconomics and financial markets