Yuan Stability Amidst Evergrande Crisis: Analysts Remain Confident
Introduction:
The ongoing crisis surrounding China Evergrande Group has sent shockwaves through global markets. However, analysts expressed confidence that the nation’s currency, the yuan, will remain unaffected. Despite the magnitude of Evergrande’s debt and its potential impact on local markets, the yuan has demonstrated resilience, with experts attributing its stability to factors such as potential central bank intervention and positive trade dynamics. Analysts even recommend going long on the Chinese currency, paired with short positions in other currencies, as underlying flows remain favorable for the yuan.
Yuan Stability Amidst Evergrande Crisis:
The stability of the yuan amidst the Evergrande crisis may appear counterintuitive, given the company’s substantial debts. However, the offshore yuan experienced a temporary decline of 0.9% in the days leading up to Evergrande’s missed interest-payment deadline. Since then, it has bounced back, indicating renewed stability. One significant factor contributing to this stability is China’s central bank, which is expected to intervene to prevent sudden depreciation. Analysts from Morgan Stanley also highlight the favorable underlying flows for the yuan, recommending long positions in the currency.
Trade and Tensions:
The recent release of a senior executive from Huawei Technologies has sparked hopes of easing trade tensions between the United States and China, which could further support the yuan. Analysts from JPMorgan suggest positioning through options, considering potential tariff reviews on select Chinese products by the U.S. government. While the timing and outcome of tariff developments remain uncertain, even waiting for positive news can be beneficial. JPMorgan favors a two-month CNH call option coupled with a reverse knock-out strategy, reflecting optimism that the yuan will appreciate within a specific range if tariffs are eased.
Bearish Views and Risks:
While optimism prevails, analysts advise caution. Becky Liu from Standard Chartered warns that a messy situation with Evergrande could still lead to modest yuan depreciation due to a stronger dollar, increased risk-off sentiment, and foreign investors selling Chinese assets. Erik Nelson of Wells Fargo predicts a potential drop in the yuan to levels not seen since November 2020, driven by capital outflows and slower economic growth. However, Nelson prefers a short AUD/CAD trade over a direct bet against the yuan. Other analysts highlight the potential risk to the yuan stemming from rising U.S. yields rather than the Evergrande contagion. Iris Pang of ING expects mild depreciation as the U.S. begins tapering, while Cui Li of CCB International Securities anticipates a minimal impact from Evergrande, but a rebounding dollar could exert downward pressure on the yuan.
Factors Supporting Yuan Stability:
Most analysts highlight China’s significant trade surplus as a key factor that will help the yuan withstand the Evergrande crisis. Since the pandemic, China’s trade surplus has surged by more than 50% on a 12-month rolling basis. This surplus acts as a buffer for the yuan, providing support amidst the ongoing global supply chain disruptions. Stephen Chiu of Bloomberg Intelligence emphasizes that as long as the pandemic and supply chain challenges persist, China’s trade surplus will continue to underpin the stability of the yuan.
A brief history of the yuan, China’s currency:
Early Years (1949-1978): Following the establishment of the People’s Republic of China in 1949, the Communist Party introduced a planned economy and embarked on various economic reforms. In 1949, the People’s Bank of China (PBOC) was established as the central bank, responsible for issuing and managing the country’s currency. Initially, the yuan was pegged to the U.S. dollar at a fixed exchange rate.
Yuan Reforms and Exchange Rate Adjustments (1978-1994): In the late 1970s, China initiated economic reforms under Deng Xiaoping, transitioning from a centrally planned economy to a more market-oriented system. As part of these reforms, the government implemented significant changes to the yuan. In 1981, China introduced a dual-exchange-rate system, which consisted of an official exchange rate for trade and a higher rate for non-trade transactions. This move aimed to boost exports and attract foreign investment.
Conclusion:
Despite the turmoil caused by the Evergrande crisis, analysts express confidence in the stability of China’s currency, the yuan. The potential intervention of the central bank and the positive dynamics of China’s trade surplus contribute to this confidence. While some analysts warn of potential risks and uncertainties, many recommend long positions in the yuan paired with short positions in other currencies. As the situation evolves, market participants will closely monitor developments, particularly central bank actions, and trade dynamics, to gauge the ongoing impact on the yuan.
