Market Insights

Can China’s Currency Bull Run Continue?

bull statue

On 27 May 2020, the renminbi strengthened against the US dollar by about 11%. The renminbi has maintained its strength; this is especially noteworthy given that other currencies, such as the Russian ruble, have not demonstrated similar gains. The story, therefore, is not merely one of dollar weakness, as China's sustained success is a clear indication of its own economic strength. Given this, it's time to take a deep dive into the factors that are contributing to China's currency bull run. If this is something that you're interested in learning more about, read on as we break down the key forces at play influencing the currency’s trajectory.

Ties with the Biden Administration

China has frozen its currency at the restricted level agreed to with the Trump Administration. Trade tariffs are a point of contention between the two countries. And while there is no indication that they will disappear anytime soon, China's ties to the Biden administration may result in more amicable trade agreements. Indeed, the two countries may reach a more orderly agreement for trade in the near future. Could China allow its currency to remain strong or even become stronger than it is currently? If it does, policy intervention may go by the wayside which will allow market forces to operate unhindered.

If the Biden administration is not successful in convincing Beijing to follow through on promised purchases of U.S. goods, energy, and services, a new China tariff probe could be launched. The Trump administration used a 40-year-old trade law called Section 301 of the Trade Act, which identified China as a threat to US intellectual property rights, to launch tariffs on hundreds of millions of dollars worth of Chinese imports in 2018 and 2019.

Although China attempted to make good on the agreement, it was unable to reach its goal of increasing U.S. purchases by $200 billion above 2017 levels during 2020 and 2021 when the country was disrupted by the global pandemic and supply chain bottlenecks. In an attempt to keep the promises made during the war, China met less than 60% of its purchasing goal.

Chinese Government Bonds Offer High Yields

Chinese government bonds offer a larger yield than other major economies. This provides a good opportunity to earn more income on the bond's investment. The combination of China liberalizing its capital markets and the larger relative yield compared to other securities will attract more foreign investors to invest money in China. With the expected addition of Chinese government debt to reputable bond indices, such as FTSE Russell's World Bond Index, it will be more beneficial for investors to add these bonds to their portfolios. If the US dollar remains weak, investors will have an added incentive to purchase renminbi-denominated securities.

Global Investors Snap Up Chinese Stocks

International investors have invested $16.6 billion into mainland Chinese stock markets in January, even as local investors remained cautious with their investments. This is only the fourth time that worldwide investment has exceeded $10 billion in a single month. Institutions want to buy shares in China these days, rather than regular people who stopped buying shares in mainland China last year. The news comes as global investment firms have become increasingly positive on Chinese stocks over the last few months.

Chinese stocks have rallied, in part, due to the fact that the Chinese government wants stocks to rally as they gear up for their next economic growth cycle at their national congress in the fall. The growth is expected to be driven by President Xi Jinping’s administration. Additionally, markets have entered a bullish period due to the impending U.S. Federal Reserve interest-rate hike, while the U.S. market has grown substantially over the past few years.

Analysts are betting that Beijing wants to ensure continued growth as it approaches the fall of the year. The National Congress is approaching, where Xi Jinping will be elected for a third term. It's important to note that being elected for a third term has never happened before, which is why it would be quite valuable to keep China's currency growth going.

China has made several abrupt policy changes in the last 18 months, cracking down on alleged monopolistic practices and the high reliance of property developers on debt. The policy changes have surprised global investors. For example, Beijing announced a crackdown on online advertising in January and reversed itself in March.

During Q3 of last year, the percentage of the portfolio invested in China has decreased from 35% to 27%, while the amount of money the fund has invested in India has increased from 8.5% to 12.7%.

Clear Signs of Progress in China’s Stock Market

The Chinese mainland stock market is very different from the US stock market. Although it is the second-largest in the world by value, rather than large institutions, regional traders dominate the Chinese market. The market has been compared to a casino, but things have begun to change.

China’s A-shares market is moving from being dominated by retail investors to being dominated by institutional investors, as evidenced by index giant MSCI adding A-shares to the benchmark MSCI Emerging Markets Index in 2018. But retail investors still dominate the market.

Although some economists believe China’s regulatory crackdown has ended, they also do not believe that it implies a reversal of additional regulation. However, these economists do not advocate an overly pessimistic approach; they believe there are opportunities in the new energy and technological growth markets.

China’s Opening to Foreign Finance

Global financial firms are increasingly willing to invest in mainland China. BlackRock, Goldman Sachs, and UBS have each bought full control of their mutual fund or securities operations in the last few years, and each of them is jumping at the chance to make a profit through these investments. The stock of the mainland-based financial firm KWEB has risen by 5.4%over the last year and is now sitting at a new all-time high, while other market indexes have also inched up throughout Hong Kong as well as mainland China.

Overseas investors generally “like to buy China for growth” rather than banks and other industries, many of which are state-owned. As these companies excel, their stock prices increase. However, the performance of these companies is less likely to be sustained than the performance of purely private companies; that is, the China market is not an easy bull market. It’s more likely to be bought on the possibility of gains rather than the potential for gains.

China’s Ban on Cryptocurrency

It wouldn’t be an exaggeration to say that cryptocurrency has played an important role in just about every major economy in the world. This is why it isn’t at all surprising that it has also managed to affect China as well.

China has had a positive relationship with cryptocurrencies since 2011, when BTC China, the first cryptocurrency exchange in the country, began trading. The following year, Baidu, China’s search engine giant, began accepting Bitcoin as payment for website security services. In 2013 and 2014, large-scale cryptocurrency mining operations started to gain ground in the country.

Cryptocurrency mining, as an industry, continued to grow in popularity throughout 2016 and 2017. By late 2016, investors were seeing value in digital currency, and by early 2017, the Chinese government began to worry about the security of their fiat currency. Fearing cryptocurrency would replace their currency, the government banned initial coin offerings (ICOs) in 2017

And while China once had the world’s largest share in both Bitcoin trading and mining, the country would soon reassess its stance on cryptocurrency. In September 2021, China’s government announced that it would forbid cryptocurrency mining and trading. This was a big change from decades past when China had embraced digital currency as a digitized version of the country’s fiat currency, the renminbi.

China has taken a hardline stance on cryptocurrency as they've made cryptocurrency transactions illegal and have banned citizens from working for cryptocurrency companies. Despite this, the price of Bitcoin rose. This highlights how cryptocurrency is immune to any and all regulation no matter how aggressive it may be.

Virtual currency miners both large and small may move their operations onto servers located outside of China to evade government regulation, according to industry experts. In addition, Bitcoin and other digital currency exchanges also may move outside of the country as they drop domestic customers from their rosters. These moves highlight how virtual currencies can evade government control.

For the past few years, China has been putting growing pressure on crypto over concerns about money laundering and other illicit uses of online currency. As a result, stakeholders in crypto are leaving the country. Only about a quarter of the original crypto peer-to-peer lending startups in China remain in the country, as these firms and their stakeholders have left the country due to China’s hands-on approach to crypto.

For cryptocurrency miners, there’s good news, at least for the short term: mining for digital currency should get easier overseas as Chinese miners leave the market. Smaller operators, meanwhile, will have an advantage over large miners because of their agility.

Singapore has positioned itself as a prime location for operations that need not be physically onshore. The country has accepted a large number of cryptocurrency license applications within the last year. From China, e-commerce giant Alibaba, as well as the digital finance firms Yillion Group and Hande Group, have applied for licenses. Other Asian countries have not been so welcoming to crypto, which strengthens Singapore's position.

Financial technology, or “fintech,” is growing in Western Europe, experts say. Fintech covers cryptocurrencies. More than $1 trillion has flowed into the European fintech economy this year, representing a quarter of all global trade. That puts Europe at the top of the global crypto economy, according to recent estimates.

In China, the crackdown on crypto has forced traders to go underground, but it wouldn't be a stretch to assume that government-issued digital currencies will eventually be the norm. Indeed, it wouldn't be surprising if China eventually came out with their own official digital currency that will be issued via major banks.

A handful of countries are considering adopting new digital currencies to facilitate trade between people and companies, without a bank serving as the intermediary. Proponents argue the currencies would capture the benefits of cryptocurrencies that make exchanging money easy, while avoiding the price volatility problems of decentralized digital assets like bitcoin.

Chinese authorities may eventually change their position on non-state-sanctioned digital currencies to a more tolerant view, although the legal criteria would have to prevent the use of digital currencies for any forms of fraud or illegal activity.

The future of fintech and cryptocurrencies will be a major factor when it comes to China's currency bull run. It would be best to monitor this situation closely and be in the know about any changes.

Historical Performance

While China’s currency may look good on paper, it’s important to note that historical performance has very little to do with sustained performance. The implication of the strength of the Chinese yuan is, therefore, not only important for investors concerned with currency issues but crucial for investors of all types who need to decide whether they want to be exposed to currency movements or not.

Conclusion

We hope this article proves to be useful when it comes to helping you gain a better understanding of China’s currency. As you can see, there is no surefire way to determine whether the bull run will continue. Indeed, there’s a valid argument to be made for both believers and naysayers. For now, the best thing to do is try to remain levelheaded and observe the situation as objectively as you can so that you can make the most informed financial decisions possible.

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