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China may be the only major economy to notch growth at all in 2020, quite the reversal after the onset of Covid-19 triggered a historic collapse early in the year. This revival has been reflected in the yuan, Asia’s best performing currency this quarter. There’s good reason to think it isn’t a fluke.
Bloomberg Economics projects China’s gross domestic product will grow 2% this year; the Organization for Economic Cooperation and Development last week raised its forecast to 1.8%. That’s miles ahead of the first quarter’s 6.8% plunge. Recent data suggest the bounce might have staying power: Exports and industrial production have chugged away over the past few months, while retail sales rose for the first time in August since the pandemic began.
In that light, it’s little surprise the yuan has gained more than 4% since the end of June, after weakening in the first three months of the year and stagnating in the second quarter. This trend also comes amid the central bank’s relatively restrained approach to juicing the economy.
The People’s Bank of China hasn’t performed the gymnastics of the Federal Reserve, or toyed with the negative interest rates that prevail in Europe and Japan, and might soon be considered in the UK. And like many Asian currencies, the yuan has been buoyed by a weakening dollar as the Fed slashed rates and resumed quantitative easing.
The PBOC is a familiar presence in markets and limits how much the currency can fluctuate in a given day. So this isn’t a pure rally the yuan is enjoying. It’s happening because the authorities are tolerating it. The central bank frets about financial instability a softening currency could bring, and has warned that ultra-loose policies pursued by developed-world central banks have had too many spillover effects.
Policy makers spent the year before the pandemic worrying about the accumulation of too much debt. (For its part, China has been known to change the rules suddenly, leading to massive gyrations across global asset classes.)
Over the years, the reason cited most often for halting or damping the yuan’s periodic appreciation has been the potential threat to export competitiveness. Until 2005, the yuan had a hard peg of 8.3 per dollar that was almost entirely about preserving the advantage of a weaker currency.
—Bloomberg