As reopening China chases foreign capital, this may be the year of the yuan
- China is open for business again and seeking foreign investment
- This means solid demand for the renminbi, even as the dollar softens with interest rate increases tapering off
With the government clearly pushing economic growth in China, the desire of investors not to miss out is likely to trump coronavirus fears. Investors have to be in to win and the fear of missing out can be a powerful motivator.
This willingness to engage with overseas partners was exemplified last week in the tone of a virtual meeting between Yin Li, the newly appointed secretary of the Beijing municipal party committee, and Brian Roberts, chairman and CEO of Comcast Corporation.
As China’s efforts to attract new inflows of foreign capital bear fruit, it must surely translate into greater demand for the yuan.
Greater yuan turnover on the foreign exchanges is already evident in data released last month by the Bank for International Settlements (BIS), often described as the central banks’ central bank, covering the three-year period ending April 2022.
Among the 39 currencies covered in its Triennial Survey, “the Chinese yuan (CNY) saw the fastest growth in [foreign exchange] trading between April 2019 and April 2022”, the BIS wrote. “CNY trading rose by over 70 per cent after adjusting for exchange rate movements, to US$526 billion per day. This rapid growth elevated the CNY to the fifth most traded currency in the world.”
Yet, the BIS also noted, “CNY turnover remained low relative to the size of China’s economy [at] 3 per cent of annual GDP [gross domestic product], compared with 30 per cent of GDP for USD and 6 per cent for the median [emerging market economy] currency.”
There would seem to be plenty of room for yuan turnover to increase further, but what’s perhaps even more notable is that the rise in yuan trading that the BIS highlights occurred during a three-year period, the latter part of which was dominated by the coronavirus pandemic which saw China in lockdown.
Of course, an expansion of trading does not necessarily mean a stronger yuan but in the current circumstances, where China is not only reopening but also seeking overseas investment, that might be a realistic expectation, and especially with regard to the US dollar/yuan exchange rate.
With currency market sentiment evolving, the dollar has already drifted down from its 2022 highs.
That drift lower may continue and, if so, the yuan looks well placed to strengthen further, boosted by investor capital inflows seeking to benefit from China’s economic reopening.
Neal Kimberley is a commentator on macroeconomics and financial markets