Neal Kimberley

Macroscope | What a strong dollar means for foreign investors in China

The Chinese economy is showing signs of recovery and inflation isn’t a problem for the country’s central bank, unlike in the US and Europe

Given the centrality of the US dollar to the global economy, however, foreign investors buying Chinese assets need to evaluate the likely trajectories of both the yuan and dollar

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People run stalls from car boots at a market in a car park in the northeastern Chinese city of Shenyang on July 2. Recent data suggests China’s economy is starting to pick up. Photo: AFP

Neal Kimberley

Published: 3:30am, 6 Jul 2022

The sight of some green shoots of economic recovery in China may well prove to be the catalyst for renewed foreign investor enthusiasm for Chinese assets. But increased demand for yuan-denominated assets may not necessarily run alongside material rises in the value of the yuan on foreign exchanges.

All foreign exchange trades are comparative judgments. Market participants weigh up the prospects of one currency against another. In the current context, as the second half of the calendar year begins, the US dollar remains strong on foreign exchanges. Other currencies, including the yuan, have been playing supporting roles.

That said, recent Chinese data suggests China’s economy is starting to pick up.

Green shoots of economic recovery may be discerned in figures released last Thursday showing that China’s official manufacturing purchasing managers’ index (PMI) rose to 50.2 in June, up from May’s 49.6, the first time it had been above 50 and in expansion territory since February.

In addition, the official Chinese non-manufacturing PMI, which reflects business sentiment in the services and construction sectors, hit 54.7 in June, in sharp contrast to May’s 47.8. Again, this was the first time this figure had been above 50 since February and it was also the fastest pace of expansion in this sector in 13 months.

Also, while acknowledging that problems do remain, the American Chamber of Commerce in China said last week that US firms operating in the country were reporting marginal improvements in business conditions.