Currently, what ignites market’s interest has been focused on a few questions:
- What is the Yuan’s exchange rate with the US Dollar?
- Is the trend sustainable as the global economy normalizes with vaccination advancement?
- Where will the RMB exchange rate go at end-2021, particularly will it break the psychological level of 6?
What is the yuan’s exchange rate with the US dollar? The exchange rate between the Chinese yuan and the US dollar, is the value of one currency against the other. The yuan’s exchange rate to the US dollar is quoted as USD/CNY to represent how many yuan it takes to buy one US dollar. In China’s case, a lower yuan exchange rate figure indicates a stronger Chinese currency as it means it takes fewer yuan to purchase one US dollar.
China’s Yuan (RMB) has gained more than 10% against the USD since June 2020, and currently stands at about 6.45. This has eaten into profits as many of the exporters take payment in Greenback, due to suppliers and staff being paid in Yuan.
Is the trend sustainable as the global economy normalizes with vaccination advancement? Normally, except for the factor of historical high interest rate differentials which might last for a longer period, other factors will be normalized as the global economy recovers with the vaccine roll-out, as a result it will not become a reason to support the RMB exchange rate any longer. First, the economic fundamentals to support RMB in the past year such as growth divergence and exceedingly strong exports will sooner or later normalize together with the global economy recovery, although the timing is not certain yet. The continuing Covid-19 pandemic remains the prime risk to the global economy which is fraught of uncertainties of vaccine effectiveness and distribution. That means, the strong RMB momentum might only remain before the global economy normalizes.
Where will the RMB exchange rate go at end-2021, particularly will it break the psychological level of 6? Continuing flows into China’s bonds and stocks has one yuan bull predicting the currency could strengthen to a level not seen in nearly three decades. According to Liu Li-gang, chief China economist at Citigroup Inc, Bloomberg reports predicts the currency could rally by 10 percent to 6 per US dollar or more by the end of 2021. The yuan has not been that strong since late 1993, just before China’s unification of official and market exchange rates triggered a plunge in the currency. A rapid advance in the yuan could impair Chinese exports by making them more expensive. That will in turn hurt China’s growth, because outbound shipments have emerged as a key driver for the economy on global demand for its pandemic-related goods. Also, sustained appreciation in the currency could attract speculative money inflows, fueling local asset bubbles and creating financial risks. Policy makers will seek to slow the advance, said Dariusz Kowalczyk, senior emerging-markets strategist at Credit Agricole CIB.
At 7 Seas we will continue to monitor this trend and help our customers minimize the effects of the currency change. We can also help by exploring other low cost country alternatives. Please let us know how we can help.