Why the yuan could soon shake off its sluggishness against the US dollar

Name: World’s first coronavirus reinfection case confirmed in Hong Kong, a university study reports
Uploaded: 2020-08-28T19:30:08.000Z
Duration: 3 min 49 s
Description: World’s first coronavirus reinfection case confirmed in Hong Kong, a university study reports

Demand for Chinese exports and bonds is likely to grow in the coming months as economies recover and Chinese yields continue to stand out. But US-China tensions remain a key risk

Reading Time:3 minutes

Why you can trust SCMP

A vessel loaded with containers approaches the Yangshan Deepwater Port, off Shanghai, on July 12. China’s exports have exceeded market expectations for five consecutive months. Photo: Bloomberg

Sylvia Sheng

Published: 3:30am, 29 Aug 2020Updated: 4:09am, 29 Aug 2020

While the US dollar has languished in weakness over the past few months, the renminbi has also been somewhat sluggish. This underperformance is notable given just how poorly the dollar has done of late.

Since the dollar fell from its peak in late March, the renminbi has gained a meagre 2.5 per cent against it, when the Australian dollar has soared 24 per cent, and both the euro and Japanese yen have made respectable gains. Can the yuan catch up with the other major currencies?

In the coming months, there are a few important fundamental factors which could boost the yuan against the dollar.

First, there should be strong yuan demand through the trade channel. Despite slowing global demand amid the Covid-19 crisis, China’s exports have held up remarkably well, beating market expectations for five consecutive months since March. In July, China’s export growth jumped 7.2 per cent year on year, compared to an average growth of 0.5 per cent last year.

03:49

World’s first coronavirus reinfection case confirmed in Hong Kong, a university study reports

This solid export performance is likely to continue. As the risks of a Covid-19 resurgence lurk until a vaccine or more effective treatment is found, demand for medical supplies will remain strong. The same goes for tech products that support a work-from-home lifestyle.

Moreover, as the developed world continues its economic recovery, this should drive a rebound in global demand, underpinning China’s exports. However, import-related foreign exchange outflows will remain muted given weak oil prices and sharp declines in China’s demand for outbound tourism.