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Booming exports in Covid-19 crisis let China stomach stronger RMB

Bloomberg News
Bloomberg News • 4 min read
Booming exports in Covid-19 crisis let China stomach stronger RMB
China’s ability to export more goods means officials will be in no rush to rein in their strongest yuan in more than two years.
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China’s ability to keep selling more of its goods abroad means officials will be in no rush to rein in their strongest yuan in more than two years.

The People’s Bank of China in November has refrained from using tools to limit the yuan’s advance, even as the currency heads for the longest run of monthly gains in six years. That’s a reversal from last month, when authorities made it cheaper to bet against the yuan and eased some control over the exchange rate, moves that were interpreted as part of Beijing’s effort to rein in appreciation.

Apart from friendlier ties between Washington and Beijing, the currency is also climbing on bets the nation’s rebound from the pandemic is well on track. The premium that Chinese government bonds offer over American debt is near the highest on
record, which attracts foreign inflows and supports the yuan. A weak dollar provides yet another boost.

“China will likely lead in terms of the macro economic recovery around the world in the coming six months, so its yield advantage will remain intact and the currency will keep rallying,” said Stephen Chiu, a strategist at Bloomberg Intelligence.

One theory points to evidence that the rallying yuan isn’t actually hurting Chinese exporters. Demand is surging globally for everything from hazmat suits to medical instruments, in large part produced in China. A gauge measuring the country’s outbound cargo prices soared to the highest level in six years this month, according to data from the Shanghai Shipping Exchange. In October, China’s export rose at the fastest pace since early 2019, beating estimates.

The resilience of exporters means China may not need to guide the yuan weaker af- ter it soared more than 9% since late May. A stronger exchange rate also helps make imports cheaper and boosts domestic consumption, a goal President Xi Jinping hopes to achieve as he pushes for a self-reliant economy. Currency strength will also attract more foreign buyers to Chinese bonds and stocks, a vital step as Beijing seeks to promote the yuan’s global use.

“The PBOC is allowing the yuan to follow market demand and supply forces, because they are well aligned with China’ strong fundamentals,” said Dariusz Kowalczyk, senior emerging-markets strategist at Credit Agricole CIB. The Chinese currency will advance further next year due to the country’s economic rebound from the virus pandemic and a weaker dollar, he added.

Chinese exporters are resilient because they are receiving more orders of protective equipment and work-from-home electronics products from foreign buyers as the pandemic spreads, Nomura Holdings Inc. economists led by Ting Lu wrote in a note. China’s export growth could remain elevated for another few months, they said, as there’s no sign of improvements in virus control overseas.

For more stories about where the money flows, click here for our Capital section

Apart from strong exports, the yuan is also bolstered by China’s solid recovery from the pandemic, and capital inflows chasing
onshore bonds’ wide interest-rate premium over yields seen elsewhere in the world. A Joe Biden win in the US presidential elec-
tion also raised hopes for friendlier China-US ties, also a boon for the currency.

The PBOC is not eager to slow those gains. In the past eight sessions, the central bank set its reference rate less than 0.03% away from the average forecasts in Bloomberg surveys with traders and analysts. Prior to that, the fixing was weaker than expected for 10 days in a row, with the bias on Nov. 6 being the largest in more than a year. The rate — which limits the onshore yuan’s moves by 2% on either side — is an important tool for Beijing to guide sentiment.

Beijing took more fierce measures to rein in the rally last month. On Oct. 27, China said some lenders stopped using a factor used to smooth out volatility when submitting their fixing quotes. And earlier last month, the authorities scrapped a two-year rule that made it expensive to bet against the yuan, and allowed some domestic institutional investors to buy more overseas bonds and stocks.

“Better economic data gives the PBOC more room to let the yuan run hot,” said Jian Hui Tan, a foreign-exchange strategist at Informa Globalmarkets (S).

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