Nov 11, 2021 04:44 AM

Yuan Hits Five-Year High as Exports Surge

An index of the yuan against 24 other currencies has held in near-record territory for two straight weeks.
An index of the yuan against 24 other currencies has held in near-record territory for two straight weeks.

Surging exports and a wider yield spread have driven China’s yuan to its highest level in five years. Analysts say they expect the currency to continue appreciating over the long run.

The CFETS RMB Index, which tracks the yuan against 24 other currencies, gained nearly 6% this year to 100.83, near the record high of 100.84 reached Jan. 22, 2016. The index has held above 100 for two consecutive weeks.

The strong yuan reflects robust exports. China’s trade growth has remained well above pre-pandemic levels all year. Exports through October surpassed those for all of 2020. Shipments rose 27.1% in dollar terms last month from a year earlier to $300.2 billion. That was the 13th straight month of double-digit growth.

Another factor is China’s high yield spread versus U.S. Treasuries. The spread has recently been between 1.3 and 1.4 percentage points after earlier topping 2 percentage points. The high yield spread makes Chinese capital markets more attractive to investors. China’s recently launched cross-border wealth management connect trial program, allowing residents of the Chinese mainland, Hong Kong and Macao to make cross-border investments, also shows more northbound capital inflow than southbound outflow.

Chinese and U.S. short-term interest rates have not adjusted to keep pace with their respective economic fundamentals, said Xu Xiaoqing, chief economist of DH Fund Management Co. Ltd. China’s central bank has been more cautious in exiting from stimulus toward more normal monetary policy, Xu said.

Adjusting for core inflation, China’s interest rates are higher while those in the U.S. are too low, making the Chinese currency’s real interest rate spread against the dollar rise sharply and providing strong support for the yuan, Xu said.

Although the dollar has been buoyed by the U.S. economic recovery and the Fed’s reduction of asset purchases, yuan-denominated assets have increasingly acted as an investment and hedging tool, said Wang Youxin, a researcher with the Institute of International Finance at the Bank of China.

Foreign investors’ holdings of Chinese government bonds reached a record high last month. Offshore holdings of Chinese government bonds totaled 3.5 trillion yuan ($550 billion) at the end of October, according to data released by China Central Depository & Clearing Co. Foreign holdings of Chinese government bonds increased more than 15% since the beginning of this year, the data show.

There is more buying than selling in the onshore yuan market as strong exports have led to large holdings of foreign currencies at Chinese banks, according to a foreign exchange market participant at a Chinese bank. Exporters rush to exchange foreign currencies holdings into yuan whenever there is a small dip the currency’s value, providing further support for the yuan, a forex market participant at a foreign bank said.

Relatively weaker imports and a decline in overseas acquisition and investment by Chinese companies have curbed demand for foreign currencies, according to a forex market participant at a Chinese brokerage.

The CFETS RMB Index is expected to continue above 100 in the fourth quarter at least until early 2022, when seasonal fluctuation in trade and the dollar’s strength may weaken the yuan, said Xie Yaxuan, chief macro analyst at China Merchants Securities.

The growth gap between the China and U.S. economies may narrow in 2022, which may also put some pressure on the yuan, Zhong Zhengsheng, chief economist of Ping An Securities, wrote in an article.

China’s GDP grew 4.9% year-on-year in the third quarter of 2021, much lower than the 7.9% growth rate for the second quarter and the 12.7% growth rate for the first half of the year, official data showed.

Economists project that the grow rate will slow further in the fourth quarter. HSBC Bank PLC economist Chen Jingyang forecast 4.6% growth in fourth quarter. Economists at Nomura International (Hong Kong) Ltd. predicted that economic growth will slow to 3% in the fourth quarter, with Macquarie projecting around 4%.

In comparison, the U.S. economy grew at a 2% annualized pace in the third quarter, its smallest increase since the end of the 2020 recession. Economists largely say they expect the U.S. to bounce back in the fourth quarter and continue expanding into 2022. Goldman Sachs estimated 4.5% growth in the fourth quarter of 2021 and the first quarter of 2022.

Contact reporter Denise Jia ( and editor Bob Simison (

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