Macroscope | Why the wind behind the Chinese yuan’s strength is likely to die down in 2022
- As yield differentials that previously favoured the yuan narrow, the currency market might see more reasons to favour countries such as the US that have tightened monetary policy, and, by extension, fewer reasons to hold the renminbi
Even without a pandemic, rebalancing an economy the size of China’s would be no easy task. But that’s what Beijing aims to do. Monetary policy support from the People’s Bank of China will help keep Chinese economic growth on track. The yuan also has a part to play, but it will be a changing role.
The currency market may choose to recalibrate its view of China’s currency in 2022. Yuan strength could then begin to wane.
To a large extent, present renminbi strength is a reflection of the foreign exchange market’s view that, despite China’s own problems, it is still a better bet than a lot of other economies.
This prevailing wind may blow a while longer. Noting the possibility of an improvement in China-US trade relations, and feeling that “Chinese exporters have yet to restore their [foreign exchange] conversion ratios to levels seen before trade tensions, so they still have excess [US dollar] savings to unload”, HSBC reassessed its view on the yuan last week. It lowered its first-quarter 2022 forecast for the US dollar/Chinese yuan exchange rate to 6.40 from the previous 6.60.