Key Takeaways

  • The Chinese yuan has appreciated rapidly and significantly over the last few months.
  • China’s central bank responded by changing FX regulations which will make it easier for banks in China to short the yuan.
  • Traders are bullish the yuan over the medium-term, thanks in part to expectations that a Biden presidency will lead to a less volatile US-China relationship.

Spot (mid-market) rate = 6.7145 CNY/USD (12:25pm, October 14, 2020)1

China’s central bank halts historic rally of Chinese yuan (CNY)

  • Last Saturday, China’s central bank put a halt to the latest rally in the Chinese yuan. The currency had risen last week by the most in 15 years, and on Friday, it reached 6.6933, a 17-month high.2

  • The PBOC unexpectedly cut its FX reserve requirement ratio for financial institutions, from 20% to zero, on outstanding foreign currency forward contracts.3 The move by the PBOC is intended to create a more flexible (hedging) environment for foreign investors and will make it easier to short the yuan. It is seen as a pre-emptive bid to temper the rapid pace of the yuan’s appreciation, one that could possibly threaten China’s economic recovery.

China’s economic recovery is accelerating

The world’s second largest economy is experiencing a robust recovery – it may already be back on its pre-virus growth path. Despite the ongoing US-China trade war, both China’s exports and imports rose unexpectedly in September and at their fastest monthly paces in over a year.4 China’s thriving trade activity is remarkable at a time when other countries are still struggling to overcome the effects of the pandemic.

Coronavirus in China is under control

While second waves hit Europe and the US, the coronavirus is largely contained in China. The world’s most populous country and the origin of coronavirus now reports only a handful of cases a day.5

China’s equity & bond markets are attracting capital inflows

Bloomberg reports that foreign investment flows of $78 billion went into Chinese equities and $33 billion into China’s bonds in Q2 alone. China’s equity market (Shenzhen Comp) is up 38% over the last six months, topping the S&P 500 (up 24%), most Asian bourses, and any of Europe’s. China’s 10-Yr sovereign bonds yield an attractive 3.2% and are currently at their highest-ever positive spread to US Treasury yields.6 While the Fed remains dovish over the foreseeable future, China’s central bank is poised to move short-term rates higher.

A Biden presidency bodes well for China

  • During the summer, China-bashing came from both candidates. Many FX traders predicted that China would eventually hit back by engineering a weaker yuan, as an explicit show of support for Chinese exporters and as an implicit threat to American industry.

  • The first presidential debate on September 29 helped turn the tide for Biden and altered the China narrative. If Biden is elected, he may extend Trump’s China policy, but implement it differently – with fewer tariffs and a less confrontational approach. Expectations for a more stable US-China relationship could see the Chinese yuan make further gains against the dollar. 

Final comments:

Currency traders are bullish the yuan. This is fueled by multiple themes: 1) China’s strong economic recovery; 2) low Covid-19 cases; 3) attractive equities and bonds; and 4) expectations that a Biden presidency will lead to a less volatile US-China relationship. Going forward, these themes should continue to attract global investors, so we predict that the Chinese yuan will continue to appreciate over the medium-term (which is also in line with our broad dollar bearish outlook). A 6.50 FX rate may be reachable next year. In the near-term, however, further appreciation of the Chinese yuan may be limited, since it has already appreciated by nearly 7% in just 2-3 months. 7

Please feel free to reach out to your SVB Currency Advisor for a deeper discussion about FX, what impact it may have on your firm, and ways to mitigate risk.


1,2,4,5,6,7 Bloomberg

3 Reuters

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Written by
Scott Petruska, CFA
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