China is attracting global investors' attention, boosting the yuan
The dollar strengthened against most of the world's currencies last week, as traders bought the greenback expecting an end to the reflation trade, but China's currency bucked the overall trend (pun intended) and is on pace for its strongest month against the dollar since 2008.
Why it matters: "What we do see is a strong Chinese economy, which is part of what’s behind the strong renminbi," Jason Brady, president and CEO of Thornburg Investment Management, told WSJ.
What's happening: Investors have boosted Chinese stock and bond buying thanks to the equity market's strong rally and yields on 10-year government debt that recently topped 3% — around 230 basis points above comparable U.S. yields.
- “More and more people are coming in, and it’s only the beginning,” Jan Dehn, head of research at Ashmore, told FT. “Asia markets are going to make their way into all the major global bond indices.”
The big picture: The Chinese government has acted to keep its currency weak in the past, but both the onshore and offshore renminbi, or yuan, have strengthened significantly in the third quarter. That suggests the government has been more willing to allow market forces to move the currency.
- The strength of its exports over the past three months suggests that the currency's value has not hurt demand.
Watch this space: A recent article in the state-run China Daily newspaper noted that authorities plan to remove more barriers to using the renminbi internationally in an effort to "further promote the financial structural reform" and "create a level playing field for the renminbi and other major convertible currencies."
- "We are improving our financial market regulations in order to integrate into the global financial market," Zhang Xuechun, a deputy director general at China's central bank, said in the article.
Why you'll hear about this again: China's strict currency controls are the major reason the yuan has not been used more in global trade and Chinese assets have not been more popular among global investors. Changing that could mean an avalanche of overseas investment funds flowing into China.