The Chinese yuan pushes emerging currencies like never before – News Couple

The Chinese yuan pushes emerging currencies like never before

(Bloomberg) — The Chinese yuan has more influence over its emerging market peers than ever before, and may play a crucial role in determining their performance in the year ahead.

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Bloomberg data showed that the currency’s correlation with the MSCI Inc. Its peers from developing countries rose to record in September on a weekly basis before easing back a bit amid the omicron outbreak. While the close relationship is partly a result of China’s heavy weight, it is also driven by the yuan’s link to the Brazilian real, which has reached its strongest since at least 2008, with the Indian rupee hitting a three-year high.

The yuan’s growing global influence is another sign of China’s deepening ties across the global economy. Investors are increasingly attracted to its bonds as an alternative to US Treasuries, while some banks are calling on the yuan to join the dollar, euro and yen as the global reserve currency. However, with China’s potential offset through opaque policy making and regulatory repression, pegging too closely to the yuan may also backfire.

Magdalena Pollan, chief economist at PGIM Ltd. In London: “China will be a very important component of the emerging market stability and growth picture.” “The willingness of Chinese policymakers to stabilize growth will be very important to the outlook for Latin America, Asia and South Africa, as countries there are still very dependent on exports from China.”

The relationship between the yuan and its peers in the MSCI Emerging Market Currency Index rose to 0.81 in September on a weekly basis from 0.24 at the end of 2010, according to data compiled by Bloomberg. It was at 0.72 on Thursday. A reading of 1 means that the assets are moving at a steady pace. This has prompted traders in both emerging market and G10 currencies to look to the yuan for clues on the direction of other pairs.

While correlations can be measured in a number of ways, China’s growing presence in global trade has gradually strengthened the yuan’s ties with its emerging market peers. In 2000, the average developing country sent just 2.2% of its exports to China, while that percentage has now grown to 11.3%, according to data from Societe Generale SA.

The investment bank says the yuan’s relative stability has traditionally made it more closely related to its emerging market peers with strong and reliable policymakers such as Mexico, Chile and South Korea. But since the US-China trade war in 2018, the yuan’s links to emerging markets as a whole have grown stronger, with the average correlation rising to 83% that year, according to Societe Generale data.

The downside too

There is a risk, of course, that those same links could also affect emerging market currencies if the yuan begins to weaken. The main risk of this happening appears to be due to a potential divergence in policy, as the People’s Bank of China is expected to ease monetary policy in 2022, just as central banks from the US, UK and Australia have begun to tighten.

The yuan will face a particular challenge as the Federal Reserve seeks to raise borrowing costs, a move expected to further strengthen the dollar and outflows from emerging markets. However, so far the Chinese currency has shown to be relatively flexible for monetary policy at home and abroad.

The Chinese economy has become an increasingly important influence on global growth over the past decade, and vital for emerging markets, according to JPMorgan Private Bank. The nation’s share of global GDP in nominal US dollars rose to 17% in 2020 from 8% a decade ago, according to Bloomberg calculations based on World Bank data.

“Since the financial crisis, we have seen micro-cycles in global emerging markets, largely synchronized to the real estate and credit cycle in China and since the crisis which has been the main driver of expectations in mostly emerging markets,” said Alexander Wolff. Head of Asia Investment Strategy at JPMorgan Private Bank in Hong Kong.

The yuan’s relative resilience this year has also played a role in limiting volatility across emerging markets, in what otherwise has been a very turbulent 12 months.

“The fact that the yuan isn’t doing a lot of effort, I see it as a disincentive to volatility,” said Paul McKelle, head of global FX research at HSBC Holdings Plc in Hong Kong. “We think stability can last longer.”

(Updates with global impact in the fifth paragraph.)

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