China’s export solidity reinforces the strength of the yuan

China’s export solidity reinforces the strength of the yuan

China's export solidity reinforces the strength of the yuan

The yuan has appreciated more than 9% against the euro since its low in mid-2020. And against the dollar, against which the Chinese currency already reached its lowest level at the end of May last year, there has been a even greater increase, greater than 10%. The reason for this strengthening has a lot to do with the impressive recovery that the Asian giant experienced during the crisis caused by the pandemic.

Despite the bull run of the Chinese currency, it must be said that the muscle of the country’s economic recovery has weakened a bit lately. This has been due both to the local outbreaks of Covid-19 triggered by the Delta variant, as well as to the high prices of raw materials and the slowdown in factory activity, which has been accentuated by cuts in energy consumption. and the tightening of measures to curb the rise in property prices in China. Thus, GDP results for the third quarter show a slowdown in growth: stood at 4.3% compared to the previous year and was only 0.2% compared to the previous quarter.

Another factor to consider in the current economic environment is the faster-than-expected recovery of global trade, which has created a huge capacity shortage in shipping. In fact, the resulting container shortage has pushed up prices. While reserving a container cost an average of around $2,000 a year ago, amounts of up to $18,000 were paid last month.

Against this background, the question that should be asked is whether the time has come when these high transport costs can curb demand for products from China and whether, as a consequence, the price of the yuan could come under pressure.

We believe this scenario is a long way off, as Chinese export figures increased so much in August that all expectations were exceeded. However, this does not alter the fact that current absurdly high transport costs are not sustainable in the long term for many sectors. In this sense, sea ​​container prices appear to have stabilized somewhatas evidenced by contracts for late-year deliveries now closing at at least slightly lower levels.

Despite these adverse factors, the reality is that, today, there are not many options that can replace China from its role in the global supply chainnor in terms of quality, volumes or speed, which in other words means that we do not expect the demand for Chinese products to decrease significantly and we do not anticipate a weaker yuan from that point of view either.

Long-term prospects for investors in China remain good

It must also be said that the drop in Chinese stock prices this year has not had a negative impact on the yuan exchange rate either. The long-term outlook for investors in China remains good, with returns being supported in part by its growth differential relative to most developed countries and regions.

Many analysts also expect the Chinese central bank makes further cuts later this year in the amount of cash that banks must maintain as reserves in this institution. But the truth is that, if this measure were to take place, the country’s economic growth could be stimulated even more.

China’s central bank uses a weighted basket of currencies each day to establish bands within which the yuan can move. This basket contains 24 currencies, of which the dollar has the largest weight (close to 20%), followed by the euro (more than 17%). And the weighting of those currencies depends primarily on the volume of China’s trade with the country or region in question.

Also, while the Chinese central bank wants clean up its traditional price manipulator image, the harsh interventions of a few years ago are no longer seen. Currently, the People’s Bank of China wants to promote the internationalization process of the yuan and position it as a reserve currency, so that its stability can attract a greater number of foreign corporate and institutional investors.

It is no coincidence that the investment bank Goldman Sachs has recently suggested that the yuan will be the world’s third reserve currency in 2030 (after the dollar and the euro), and that the forecast is that more foreign investors will seek refuge in the Chinese government bonds. This assessment is consistent with the fact that more and more government bonds are issued in the local currencyand that its yields (almost 3% over 10 years) are at relatively attractive levels compared to those of other large economies.

Therefore, the sum of all these factors leads us to think that the advance of the renminbi will not be interrupted for the moment, since it is not only supply and demand that determine the exchange rate of the Chinese currency.

We expect the yuan, against the dollar, to be around the 6.25 level by the end of this year and continue this upward trend at least through the end of 2022. And against the euro, we forecast a year-end exchange rate of 7 .40 yuan per euro, remaining relatively stable for next year, although we do not rule out that by the end of 2022 it could reach levels of 7.32.

*** Isabel Ye, Director of China Initiatives at Ebury.

China's export solidity reinforces the strength of the yuan

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