The yield on China’s 10-year government bonds climbed in recent months on speculation the PBOC will start to exit monetary stimulus. That has helped widen the yuan’s interest-rate advantage over the dollar to the largest on record. Also, the currency is supported by bets that Washington may be less hostile toward Beijing under a Joe Biden administration. A global index compiler’s decision to add some onshore notes in its flagship indexes and a weaker dollar also contributed to the appreciation.
A rapid advance in the yuan could impair Chinese exports by making them more expensive. That will in turn hurt China’s growth, because the nation’s outbound shipments have emerged as a key driver for the economy on global demand for its pandemic-related goods. Also, sustained appreciation in the currency could attract speculative money inflows, fueling local asset bubbles and creating financial risks.
That’s why policy makers will seek to slow the advance, said Dariusz Kowalczyk, senior emerging-markets strategist at Credit Agricole CIB. The PBOC may further relax restrictions for funds to leave China and guide the exchange rate weaker with its daily reference rates, he said, adding the yuan could end 2021 at 6.35. The country could lose some of its export orders if the pandemic gets under control next year, helping to rein in the appreciation, said Becky Liu, head of China macro strategy at Standard Chartered Plc.
The last time the yuan got close to 6 was in January 2014, when the currency was bolstered by hot money inflows. The central bank managed to reverse the course of the rally by sharply weakening its fixing rate for two consecutive days.
“We still like the Chinese currency against the dollar, but we do recognize that the pace of appreciation will be slower,” said Stephen Chang, a portfolio manager at Pacific Investment Management Co. in Hong Kong. “We think it’s worth being overweight in China government bonds.”
– Bloomberg