China’s currency is expected to have its best six months against the US dollar as the coronavirus containment and the country’s economic recovery provide a competitive advantage that investors expect well into 2021.
The renminbi’s rise, under pressure earlier this year, underscores a turnaround in fortune as China shifted from the center of the pandemic to a largely controlled country as cases increased in the US and Europe.
Investors and analysts said China’s handling of the health crisis and subsequent economic recovery laid the foundation for a rally on renminbi-denominated bonds and stocks that accelerated after the US presidential election.
“There is a global appetite for Chinese assets, and I think it will continue to do so,” said Paul Sandhu, head of quant multi-asset solutions at BNP Paribas Asset Management.
While positive news about coronavirus vaccines has increased the appetite of global investors for even risky assets, he said, “If you don’t need the vaccine to recover, you’ll be in a better position.”
The land-traded renminbi has increased 8.4 percent against the greenback to 6.585 rupees since early June. If the currency sustained these gains through November, it would outperform the 7.1 percent gain in the six months ended March 2008 during the global financial crisis.
The currency rose more than 5.7 percent in 2020.
China’s onshore markets have soaked tens of billion dollars in foreign investment this year as stocks rebounded on the economic recovery and ensured strong demand for the renminbi required to buy stocks in Shanghai and Shenzhen.
Bond yields higher than those available in developed countries have fueled active debt investor demand as well as significant passive fund flows, said Sylvia Sheng, a global multi-asset strategist at JPMorgan Asset Management.
“On the other side of the equation. . . There is also cyclical pressure on the US dollar, ”she said, pointing to huge monetary easing by the US Federal Reserve this year that has pushed the greenback down.
Fed easing has also widened the spread between US and Chinese government bond yields, with yields on the countries’ 10-year bonds now standing at around 0.87 and 3.27 percent, respectively.
Ms. Sheng said the country’s onshore bond yields would likely remain attractive to global investors, who expect the Fed to keep interest rates at record lows at least until the end of 2021 while China is able to avoid such intense monetary stimulus.
Mansoor Mohi-uddin, chief economist at the Bank of Singapore, said Joe Biden’s victory over Donald Trump in the US presidential election further boosted confidence in China’s currency.
“Investors expect the Biden administration will not pursue the same volatile tariff policy” that weighed on China’s currency during Mr. Trump’s tenure, he said.
However, some investors have hedged their renminbi exposure in the past few weeks, BNP’s Sandhu said. He noticed three-month implied volatility, a measure of how much investors believe the currency could move as the less regulated offshore renminbi was now higher than any other Asian currency.
“Not to say that the [currency’s] The momentum is not telling us that it will continue to increase, ”he added. “But only because of the speed of the appreciation are investors a little nervous.”