HONG KONG • As China’s currency trades near to its highest level against the greenback since the 2015 devaluation, don’t expect the government to engineer a reversal any time soon, according to Morgan Stanley.
That’s because Chinese policymakers are now embracing a strong yuan as it helps boost consumption and draw inflows, said Hans Redeker, London-based global head of foreign-exchange (forex) strategy at the US bank, on Tuesday. Thanks to China’s position as the world’s largest reserves holder and trade partner, that means the dollar’s weakness will persist.
“The rising yuan has a messaging function into the region if not globally,” Redeker said. “It suggests that China sees advantages in a weak US dollar — reverse of yuan strength — as the weak US dollar helps keep the global economy via credit supported.”
China has shown a remarkable appetite for a stronger yuan so far.
While the nation abruptly devalued the yuan two years ago, currency strength may now be in its favour as it seeks to stem a three-year tide of outflows.
With global demand supporting trade, the government may also be less worried about the exchange rate’s drag on exports.
A weak dollar is where Chinese and US interests could overlap, said Morgan Stanley. The US may see dollar weakness as “the quickest and most effective way” to boost competitiveness, strategists led by Redeker wrote in a Feb 2 note.
While a strong yuan risks igniting one-way speculation and dragging down exports, China has embraced it for several reasons, according to Redeker: A weak dollar eases global liquidity, helping to keep the world economy strong, which allows China to pursue its deleveraging strategy; yuan strength slows portfolio outflows and attracts inflows; and currency gains support consumption.
“It’s going to be a yuan that will be relatively muted, relatively strong, relatively resilient,” he said. “When the equity market has been selling a lot, the yuan is providing forex stability.
This supports our view that the dollar is going to stay weak despite what is happening now.”