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China’s boom­ing ex­ports mean Bei­jing can han­dle strong yuan

- Business · Currencies · Finance · Financial Markets · China · Beijing · Bank of China · Shanghai · Xi Jinping · Crédit Agricole · Nomura Holdings · Joe Biden · United States of America · Informa Global Markets · Foreign Exchange Market · People's Bank of China · Ting · Shanghai Shipping Exchange

CHINA’S abil­ity to keep sell­ing more of its goods abroad means of­fi­cials will be in no rush to rein in their strong­est yuan in more than two years.

The Peo­ple’s Bank of China (PBOC) in Novem­ber has re­frained from us­ing tools to limit the yuan’s ad­vance, even as the cur­rency heads for the long­est run of monthly gains in six years. That’s a re­ver­sal from last month, when au­thor­i­ties made it cheaper to bet against the yuan and eased some con­trol over the ex­change rate, moves that were in­ter­preted as part of Bei­jing’s ef­fort to rein in ap­pre­ci­a­tion.

One the­ory points to ev­i­dence that the ral­ly­ing yuan isn’t ac­tu­ally hurt­ing Chi­nese ex­porters. De­mand is surg­ing glob­ally for ev­ery­thing from haz­mat suits to med­i­cal in­stru­ments, in large part pro­duced in China. A gauge mea­sur­ing the coun­try’s out­bound cargo prices soared to the high­est level in six years this month, ac­cord­ing to data from the Shang­hai Ship­ping Ex­change. In Oc­to­ber, China’s ex­port rose at the fastest pace since early 2019, beat­ing es­ti­mates.

The re­silience of ex­porters means China may not need to guide the yuan weaker af­ter it soared more than 9 per­cent since late May. A stronger ex­change rate also helps make im­ports cheaper and boosts do­mes­tic con­sump­tion, a goal Pres­i­dent Xi Jin­ping hopes to achieve as he pushes for a sel­f­re­liant econ­omy. Cur­rency strength will also at­tract more for­eign buy­ers to Chi­nese bonds and stocks, a vi­tal step as Bei­jing seeks to pro­mote the yuan’s global use.

“The PBOC is al­low­ing the yuan to fol­low mar­ket de­mand and sup­ply forces, be­cause they are well aligned with China’s strong fun­da­men­tals,” said Dar­iusz Kowal­czyk, se­nior emerg­ing-mar­kets strate­gist at Credit Agri­cole CIB. The Chi­nese cur­rency will ad­vance fur­ther next year due to the coun­try’s eco­nomic re­bound from the virus pan­demic and a weaker dol­lar, he added.

Chi­nese ex­porters are re­silient be­cause they are re­ceiv­ing more or­ders of pro­tec­tive equip­ment and work- from-home elec­tron­ics prod­ucts from for­eign buy­ers as the pan­demic spreads, No­mura Hold­ings Inc. econ­o­mists led by Ting Lu wrote in a note. China’s ex­port growth could re­main el­e­vated for an­other few months, they said, as there’s no sign of im­prove­ments in virus con­trol over­seas.

Apart from strong ex­ports, the yuan is also bol­stered by China’s solid re­cov­ery from the pan­demic, and cap­i­tal in­flows chas­ing on­shore bonds’ wide in­ter­est- rate pre­mium over yields seen else­where in the world. A Joe Bi­den win in the US pres­i­den­tial elec­tion also raised hopes for friend­lier China-US ties, also a boon for the cur­rency.

The PBOC isn’t ea­ger to slow those gains. In the past nine ses­sions, the cen­tral bank set its ref­er­ence rate less than 0.03 per­cent away from the av­er­age fore­casts in Bloomberg sur­veys with traders and an­a­lysts. Prior to that, the fix­ing was weaker than ex­pected for 10 days in a row, with the bias on Novem­ber 6 be­ing the largest in more than a year. The rate—which lim­its the on­shore yuan’s moves by 2 per­cent on ei­ther side—is an im­por­tant tool for Bei­jing to guide sen­ti­ment.

Bei­jing took more fierce mea­sures to rein in the rally last month. On Oc­to­ber 27, China said some lenders stopped us­ing a fac­tor used to smooth out vo­latil­ity when sub­mit­ting their fix­ing quotes. And ear­lier last month, the au­thor­i­ties scrapped a two-year rule that made it ex­pen­sive to bet against the yuan, and al­lowed some do­mes­tic in­sti­tu­tional in­vestors to buy more over­seas bonds and stocks.

The yuan dropped 0.11 per­cent to 6.5660 per dol­lar as of 9:49 a.m. in Shang­hai.

“Bet­ter eco­nomic data gives the PBOC more room to let the yuan run hot,” said Jian Hui Tan, a for­eignex­change strate­gist at In­forma Glob­al­mar­kets (S) Pte Ltd.

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