Forex Comment Oct 02

Yuan jumps on expected foreign demand for Chinese assets

As China's exports continue to grow, the economy expands at a fast rate and profits are bouncing, the Chinese currency will continue its rise with demand for its goods and assets

Yuan jumps on expected foreign demand for Chinese assets
National flags are set up along the street in Chongqing, China, 22 September 2020. Zou Le / Imaginechina via AFP.

(ATF) Even as China celebrates National Day and the mid-autumn festival and takes week-long holidays until October 9, trading in the offshore deliverable yuan (CNH) continues. And over the past 48 hours, CNH registered some of the largest gains since it started trading in 2010.

First the numbers.

The sharp CNH upward moves started an hour after the Shanghai-Hong Kong market closed on September 30, from about 6.8150 to the US dollar to 6.80 by 9am New York time and 6.7850 by 10am.

A second leg up - from 6.7850 to 6.7550 - occurred rapidly the next morning (October 1) in Hong Kong and Singapore between 9am and 10am. The strongest point for CNH of 6.7306 was reached on October 1 at 7.55pm Hong Kong time.

Since then, CNH has given back some of the Sept 30/Oct 1 advances. The October 2 trading range is 6.7476 - 6.7781. The current level (6pm HK time) is 6.7605.

Thinner than usual trading after the onset of East Asian holidays may have had something to do with it. But the underlying sentiment is best captured by the vast difference between key post-Covid lockdown economic recovery measures in China and the US.

As I noted on September 30, the official China September manufacturing PMI came in at 51.5 from 51.0 in August. The non-manufacturing gauge rose to 55.9 from August's 55.2. Both index readings beat expectations. A sub-index of new export orders for factories was at 50.8 for September, the first time it reached expansion territory (50 or stronger) this year, indicating continuation of strong export performance.

By sharp contrast, the US ISM Manufacturing PMI for September released on October 1 declined to 55.4 from 56 in August. It had been expected to rise to 56.3. More tellingly, the forward looking New Orders Index declined to 60.2 from August's 67.6.

China's industrial profits grew by 19.1% year-on-year in August after 19.6% growth in July, according to the National Bureau of Statistics.

There are worlds between the fast recovery in China since the beginning of the second quarter of this year and the US outlook. 

Look no further than that for an explanation of the ratcheting upwards of the yuan over the past two days. As China's exports continue to grow, the economy expands at a fast rate and profits are bouncing, the Chinese currency will continue its rise with demand for Chinese goods and assets – though, as I wrote two days ago, before the step function move upwards of the yuan, uncertainties over the outcome of the US elections will dampen the yuan's rise for now.