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Macroscope | Global economic flux means yuan bulls would do well to change focus from US dollar
- Three of the world’s largest economies – the US, China and Europe – are each in a different predicament
- This has implications not only for the dollar-yuan exchange rate but also for yuan internationalisation
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Renminbi bulls often focus on the US dollar-Chinese yuan exchange rate, but in the current circumstances, they would do well to look further afield. Greener pastures may perhaps be found in other yuan pairings such as against the euro or the Japanese yen.
Stephen Jen, chief executive of London-based Eurizon SLJ Capital, made the point last week that at present, China, the euro zone and the United States, three economic giants, each face a different economic predicament. Japan, too, is confronted with a singular challenge.
Western economies may have concluded that the coronavirus is something that has to be lived with, but China begs to differ, at least for now. The phased lockdown in Shanghai is just the latest example of Beijing’s continuing zero-tolerance attitude towards Covid-19.
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Lockdowns invariably come with negative economic consequences that necessitate supportive fiscal and monetary policy responses to cushion their impact on the general population and business. China is no different and the People’s Bank of China has already made targeted monetary policy interventions and has room to do more if required.
Accommodative PBOC monetary policy in turn helps support Chinese government bond prices. Given that consumer price inflation in China remains subdued, despite higher factory gate prices, such bonds continue to offer positive real inflation-adjusted yuan-denominated returns.
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Meanwhile, a stable-to-strong yuan offers China some protection against presently elevated US dollar-denominated commodity prices.
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