Yuan soars while ruble crashes during Ukraine crisis
TAKESHI KIHARA, Nikkei staff writer
March 3, 2022 03:57 JST
HONG KONG -- The yuan has appreciated to a level not seen in nearly four years on China's robust exports and an influx of funds into its capital markets, with some experts predicting that the currency will gain more users due to sanctions on Russia over the invasion of Ukraine.
On Wednesday, the yuan traded just over 6.30 per dollar, a high not seen since April 2018.
"I thought the speculation over U.S. rate hikes would lead to a weaker yuan following the Lunar New Year," said a forex dealer in Hong Kong this week. "But even during the Ukraine crisis, [the yuan] has not been sold, and there is strong pressure toward buying the yuan due to actual demand."
The spread between the two-year U.S. Treasury yield and the Chinese counterpart largely tracks the exchange rate between the yuan and the dollar. The rule of thumb is a wider rate differential denotes a stronger yuan and vice versa.
In recent weeks, the two-year Treasury yield has surged over the anticipated policy rate hikes. The movement has narrowed the U.S.-China yield margin. But the yuan has not followed suit by depreciating, disrupting the normal dynamic.
"The strong yuan has been a result of capital inflows into the onshore bond and stock markets after China assets were included in global investment indexes," said Iris Pang, ING Bank chief economist for the greater China region.
Last year, the British index provider FTSE Russell included Chinese government debt into its benchmark global bond index. Chinese government bond holdings by international investors have jumped 80% by value compared with two years ago.
Purchases of Chinese equity have been robust due to expectations for economic stimulus measures from the Chinese government. Stock buying by foreigners through Hong Kong has exceeded equity sales on a net basis for 17 straight months through February.
Chinese exports have supported the yuan as well. The country attained record trade surpluses for the full year of 2021 and broke the monthly record in December. There is a huge demand from exporters that seek to exchange dollars they have accepted into the yuan.
The yuan will continue to trade strong this month, according to an outlook from BNP Paribas. Not only is there an outsized trade surplus, Chinese have largely abstained from traveling abroad, an activity that promotes a weaker yuan, according to the banking group.
The Ukraine war has not led to the yuan being sold off. Whenever a conflict flares up, traders typically dump emerging-nation currencies and direct funds to safer alternatives like the U.S. dollar or the Swiss franc. The Russian ruble has plummeted after Western sanctions were imposed.
Yet the yuan continues to rise during this period of risk mitigation.
"The current Ukraine situation shows that the yuan is [increasingly seen as] a haven currency in Asia," said Pang.
"Some have moved to sell emerging-nation assets and buy Chinese assets," said a source familiar with the Hong Kong banking industry.
The ejection of Russian banks from the SWIFT financial network has given rise to the potential that the yuan will attract more users, adding wind to the ambition of developing a self-contained international payment sphere ruled by the currency.
"Russia has reduced U.S. dollar holdings quite aggressively and increased holdings in the euro, Chinese yuan and gold," said Zhou Hao, senior economist at Commerzbank.
Zhou added that the trading volume will climb between China and Russia. "From a five-10 years perspective, Russia's RMB [renminbi, or Chinese yuan] holding will definitely increase," said Zhou.
David Chao, global market strategist for the Asia Pacific region ex-Japan at Invesco, believes the sanctions against Russia will lead to consequences that will favor the yuan.
"Over time, [the sanctions] could also erode confidence in the USD as a form of global payments and stable store of wealth and could strengthen the internationalization of the RMB," said Chao.
The yuan accounted for 3.2% of international settlements in the month of January, according to SWIFT data, breaking the record set in August 2015. The share is still dwarfed by the dollar and the euro, which each control nearly 40%. But the yuan has outpaced the yen for two straight months.
"We believe a number of long-term factors could boost the share of renminbi trade settlement over time," said a report from Standard Chartered bank. "These include the persistence of U.S.-China tensions prompting a structural shift away from overreliance on the USD for global settlement."
At the same time, Zhou said it is too early to declare the yuan as a safe-haven currency.
"You can't come up with this kind of conclusion only because China's yuan looks a bit stronger these days," he said.
The Chinese government maintains strict capital controls that places limits on yuan cash transactions across the border. Such restrictions pose a key difference from the dollar, which has been adopted as an international fiat.
Chinese authorities are beginning to express misgivings over the strong yuan, which can affect demand for Chinese exports. Major state-owned banks bought dollars on the open market on Monday to defend against that trend, according to Reuters. The People's Bank of China, the central bank, once again set a weak reference rate for the yuan on Wednesday.
The PBOC "has been signaling its dissatisfaction with the strength of the renminbi in recent months," a report from the British research group Capital Economics reads. "The PBOC could step in more forcefully to weaken the renminbi, either directly or via state-owned banks."
Oxford Economics, another British analytics company, predicts the Chinese currency will depreciate to 6.42 yuan per dollar by the end of the year. Factors such as the divergent monetary policies between the U.S. and China will amplify downward pressure on the yuan during the second half of 2022, according to the group.
Chinese currency seen as cross-border haven amid sanctions against Moscow
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