Forex Comment Sep 09

No lasting yuan impact from US tech stock rout

This apparent bout of yuan weakness actually has little or nothing to do with the Chinese currency's fundamentals; those are alive and well

No lasting yuan impact from US tech stock rout
Image: AFP.

(ATF) The People's Bank of China set yuan central parity against the US dollar at 6.8423 on Wednesday morning, the weakest level since September 1's 6.8498.

If you think about the PBoC's central parity rate as a kind of forecast the bank will reinforce by way of intervention, then the Chinese central bankers got it just about right: by 7pm HK time, CNY (the onshore yuan) stood at 6.8457, its weakest since August 31.

But this apparent bout of yuan weakness actually has little or nothing to do with the Chinese currency's fundamentals. Those are alive and well.

China recorded much higher than expected export growth of 9.5% year-on-year in US dollar terms in August, racked up a trade surplus of $58.9 billion – a 27% increase in its surplus with the US. 

As US President Trump once again ramps up his anti-China rhetoric, desperate to score some points with the US electorate, US companies and consumers care little; they are buying more US goods (up 20% from a year earlier) and are saying thanks but no thanks to Trump's offer to pay US companies to leave China.

It's not the latest Trump election ploy, but the meltdown of US tech stocks and the tech-heavy Nasdaq index that has temporarily halted the yuan's sharp rise since late May of this year, when China's victory over the coronavirus became obvious.

Tech meltdown

The sharp US markets' tech stock decline since September 3 is due in part to the fact that several moonshot stocks like Tesla had gotten way out of line with any conceivable reality, partly because it's becoming ever more obvious that the Trump's administration tech war with China is first and foremost hurting the US semiconductor industry, as China is rapidly building capacity and making US competitors less relevant to Chinese demand.

The US tech meltdown did, however, in the short-run, negatively impact the yuan, as portfolio investment in Chinese tech stocks such as Tencent or Alibaba followed the Nasdaq down: Less demand for Chinese equities = less yuan demand.

This won't last.

The US dollar (on the DXY) reached its lowest recent point (92.1440) as the US tech sell-off started. It now trades at 93.6150.

As US stocks stabilise, the dollar decline and the yuan rise will resume trajectories driven by their fundamentals.

I see no reason whatever why I should change my medium-range forecast of a yuan rate of 6.0 to the US dollar.

Desperate election tactics by the still-US incumbent can cause temporary setbacks for the yuan, but no lasting ones.