Chinese Renminbi: Still a one-way bet?

Almost everybody wants exposure to the renminbi these days. Here are three major factors supporting further RMB appreciation, as well as two key risks for the seemingly one-way trade

Our Bullish Case

#1 Chinese trade surplus with the US and Europe has widened despite all measures

Despite the best efforts of EU leaders and both the Trump and Biden administration, their trade deficit with China has widened over the past year. The oft-talked about reshoring of US businesses back to US soil is also simply not happening, as US manufacturing and businesses trail several Asian economies in terms of competitiveness.

Overall, a strong current account surplus led by China’s unstoppable export sector has acted as a positive driver for the yuan in the past quarters.

A note of caution may be sounded here however – recent trade statistics for April show the US trade deficit with China retreating from record highs seen in March, with consumer demand for Chinese goods seeming to lead the decline.

#2 Chinese regulators recognise that an appreciating yuan will help offset imported inflation

China’s headline inflation numbers have been on the rise, particularly in the manufacturing sector. Raw material input prices have been soaring thanks to incredible pent-up demand globally, driving producer prices through the roof, and threatening to pass higher prices on to consumers.

Since May, Chinese officials have dialled up the rhetoric on controlling imported inflation, raising the outlook of the renminbi.

#3 China’s economic growth lets them afford a different – more attractive monetary policy

Coming at the same time as regulators raising yuan allocations to foreign investors, a whole host of big-name foreign institutions have been flocking to Chinese assets. Chinese long-term bond yields are holding above 3% compared to 1.5% for the USA, setting up a torrent of money flowing into China, and in turn strengthening the currency (and attracting even more foreign money).

Our Bearish Case

#1 Risk: Chinese regulators may not be able to stomach an even stronger renminbi

The renminbi has been spinning its wheels recently, with signs emerging that regulators are quietly stepping in to curb further yuan appreciation. A stronger yuan would likely add to financial stability risks, with Chinese currency regulators recently using language such as “doomed to lose” to describe renminbi bulls.

#2 Risk: A strengthening US dollar thanks to brought-forward tapering expectations

While China’s economic rise has been positive for the renminbi, the USA is currently undergoing an economic boom as well. Everywhere one looks, they can see signs of an economic recovery (apart from the labour market perhaps).

More importantly however, recent red-hot economic activity has seen US regulators and investors wrangle over rising inflation statistics, likely putting pressure on the Federal Reserve to bring forward rate hikes earlier than expected – a bullish case for the dollar.

Our Takeaways

Overall, the days of a one-way appreciating renminbi appear to be numbered, with the currency seeming to have hit a bottom in 2021. Factors key to further appreciation have lost steam in some areas, while key developments overseas – particularly a global economic recovery, will act as a hefty counterbalance against the most optimistic renminbi bulls.