Huge Cash Piles Poised to Boost Yuan Should Biden Win, Citi Says

A Joe Biden victory in November’s U.S. presidential elections has the potential to put a fresh charge in the yuan, according to Citigroup Inc. strategists.

That’s because Chinese exporters expect a more predictable U.S.-China trade relationship under a Democrat government, and will start selling their dollar cash piles to buy yuan, the strategists wrote in a note dated Thursday. Chinese firms are currently converting just 46% of their monthly exports into local currency, far below the historical average of 56% in data going back to 2013, according to Citi calculations.

Huge Cash Piles Poised to Boost Yuan Should Biden Win, Citi Says

Surging inflows into higher-yielding yuan assets pushed the Chinese currency to its strongest since July 2018 this week, following its best quarter in 12 years. But Chinese exporters have largely stayed out of the rally, Citi says, having built up $225 billion worth of long dollar positions since trade tensions escalated in May 2018.

Huge Cash Piles Poised to Boost Yuan Should Biden Win, Citi Says

Chinese corporates “hold a cautious view on uncertainty regarding U.S. election results, especially given the 2016 experience,” strategists Lu Sun and Gaurav Garg wrote in the note. “If a Biden win is confirmed, we expect the Chinese exporters to finally start offloading USD, which could drive the next leg of RMB appreciation.”

The yuan has continued to rally this month even as Chinese authorities took steps to rein in currency strength. Officials will soon allow onshore institutional investors to buy more overseas assets, Caixin reported this week, in what could be the largest relaxation to capital controls since before the yuan’s shock devaluation five years ago.

Chinese exporters could offload $22 billion of foreign exchange per month if they were to increase their conversion ratio to the historical average, Citi strategists wrote. Corporates are likely to speed up their dollar selling toward the end of the year and the Lunar New Year, they said.

A growing chorus of market watchers are predicting the yuan will extend its advance against the dollar if the Democrats win the U.S. elections. Citi strategists predict the CFETS RMB Index, which tracks the yuan versus a basket of 24 peers, could rise to 96 in that scenario. That implies an increase of about 1% from current levels.

©2020 Bloomberg L.P.

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