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Sept. 30, 2020, 7:45 p.m. EDT

China’s yuan records best performance against dollar since 2008

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By Sunny Oh

The Chinese yuan has been making a comeback against the dollar. Is that because China has been better than the U.S. at managing the economic fallout of the coronavirus pandemic?

That’s at least what some analysts think has been happening, following the yuan’s surging value over the past few months.

“FX investors have accepted the notion of Chinese exceptionalism in growth,” wrote analysts at JP Morgan.

The yuan booked a 3.7% gain USDCNY against the dollar in the third-quarter, its best such performance since the first quarter of 2008, the chart below shows.

Analysts pointed to the combination of increased capital inflows into China, the world’s second-largest economy, and Beijing’s relative strength across the globe as catalysts of the yuan’s appreciation since the end of June.

See : What the coronavirus outbreak means for the Chinese yuan

The boost for the yuan during the third quarter, which ended Wednesday, marked its best showing against the greenback in more than a decade.

Specifically, it was the yuan’s best quarter against the buck since early 2008, when China’s surge in stimulus spending combined with worries about U.S. financial markets that were flirting with the brink of collapse to briefly power the yuan’s strength against the dollar.

This time around, the greenback has seen a dramatic weakening, in part, due to the Federal Reserve’s decision to lower interest rates to near-zero to help cushion the economy during the pandemic, and to reduce the previously wide differentials between U.S. interest rates and its counterparts in Europe and Japan.

The ICE U.S. Dollar Index /zigman2/quotes/210598269/delayed DXY -0.22% has lost 3.7% this quarter, leaving it down 2.7% year-to-date.

Yet, even as the Fed has eased policy, Chinese policy makers haven’t loosened the monetary spigots in the same way as other developed market central banks, partly due to concerns that it could lead to rampant and unstable growth in lending.

Analysts also expect China’s resilience to further contribute to the yuan’s strength. The country is forecast to grow by 2% this year, even as the U.S. is forecast to shrink by 6.1%.

Recent Chinese data has underlined the country’s bounceback from its pandemic low. Its official purchasing managers index for September came in at 51.5 for the manufacturing sector and 55.9 for the services industry. Any number above 50 marks an expansion in economic activity.

Some analysts also have noted China’s growing weight in global bond indexes, potentially another driver of increased inflows into its once tightly controlled capital markets. Beijing has slackened its grip over it’s bond markets in the hopes of earning its inclusion in world-wide debt benchmarks, which hold huge sway in terms of where money managers put their funds.

China was included in the FTSE World Government Bond Index last week. Chinese bonds also represent 5.3% of the Bloomberg Global Aggregate Bond Index /zigman2/quotes/200620640/delayed UK:GLAB +0.10% and 9.4% for JP Morgan’s emerging market bond index.

JP Morgan analysts estimate that the inclusion of Chinese government bonds into the global benchmark bond index, which is widely used by Japanese investors, would introduce $10 billion of monthly inflows into China’s debt markets starting from next October.

Over the next decade, Morgan Stanley analysts expect the move to help China attract up to $3 trillion worth of portfolio inflows, and for the yuan to account for up to 10% of global reserve assets by 2030.

Read : Investors flock to China’s bond market, spurred by fears of missing out

US : U.S.: ICE Futures U.S.
-0.20 -0.22%
Volume: 0.00
Oct. 27, 2020 11:45a
UK : U.K.: London
3,222.75 p
+3.25 +0.10%
Volume: 470.00
Oct. 26, 2020 4:35p

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