China’s Yuan Becomes Unlikely Haven as Geopolitics Roil Markets
The yuan is standing out for its resilience as global markets reel from Russia’s attack on targets across Ukraine.
(Bloomberg) -- The yuan is standing out for its resilience as global markets reel from Russia’s attack on targets across Ukraine.
While major stock markets tumbled, and currencies from the euro to the Korean won declined, the yuan is still hovering near a four-year high after Russian leader Vladimir Putin ordered an operation to demilitarize Ukraine.
“Yuan has been trading like a safe haven currency during the Ukraine crisis,” Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “Prospects for further easing should see growth recover, hence keeping Chinese equities resilient even as U.S. equities have sold off.”
The yuan’s correlation to global volatility dropped to a three-year low earlier this week, underlying a haven status partly due to efforts by Chinese policymakers to ease to support economic growth. The nation’s sovereign bonds, which lured a record 575.6 billion yuan ($91 billion) in inflows last year, have also been touted as potential alternatives to Treasuries.
A local Chinese news report on Thursday cited analysts saying that low volatility and stable purchasing power have made yuan assets more attractive and that the currency would rally to 6.3 per dollar on the risk-off sentiment.
While the yuan dropped on news of the attack, its decline against the dollar has been more muted than peers. Onshore yuan fell 0.1% to 6.3195 per dollar as of 5:30 p.m. in Beijing. The Bloomberg CFETS RMB Index tracker, which measures how the currency has done against 24 major trading partners rose to 104.16, the highest ever in data compiled by Bloomberg going back to 2007.
“Onshore corporates have large holdings of foreign currency receipts due to trade surplus position in recent years,” said Jonathan Cavenagh, senior markets strategist, Informa Global Markets. “That leaves it somewhat immune to outside risk aversion.”
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To be sure, there is a danger that the yuan becomes too strong for the People’s Bank of China, which may prompt intervention. That threat undermines the likelihood of the currency becoming a reliable haven and China’s partial capital account liberalization suggests its status remains a “work-in-progress,” according to Commonwealth Bank of Australia.
The increasing divergence between China’s monetary policy and other major central banks, which are hiking, will also put pressure on the currency.
“China’s economy has been a little unstable recently, but the authorities have shown great determination to stabilize it since the end of last year,” according to Huang Yiping, Peking University economics professor and former member of the PBOC’s monetary policy committee. “Investors may think that yuan assets including Chinese government bonds can have some safe-haven functions. Although, of course you can’t compare it with the U.S. dollar.”
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With assistance from Bloomberg