The potential for selling dollar-denominated assets and its impact on the yuan: Chinese companies may be tempted to sell their trillion-dollar dollar-denominated assets, as the US moves to cut interest rates. This move could strengthen the value of the yuan by up to 10%. Jin sees the yuan as the biggest risk that is not priced correctly in global financial markets, and it could play a big role in this context.
Capital flows and their impact on the yuan: Jin explains that capital repatriation flows could create an “avalanche” effect. If the yuan strengthens, it could see a rise of 5% to 10%, which would be acceptable to China. The theory suggests that Chinese companies have raised more than $2 trillion in overseas investments since the start of the coronavirus pandemic, which represent assets with higher interest rates compared to yuan-denominated assets.
The risk of depreciation of dollar-denominated assets: When the Federal Reserve lowers borrowing costs, dollar-denominated assets will lose their appeal. This situation could prompt $1 trillion in inflows back to China, as the price differential between China and the US narrows. Expectations suggest that the Federal Reserve may cut interest rates more aggressively than markets anticipate if US prices continue to decline.
Dollar depreciation and yuan appreciation expectations: Jin expects the US dollar to weaken due to several factors, including an overvalued dollar, the US’s twin deficits, and the prospect of a soft landing. This could lead to a significant appreciation of the Chinese currency against the US dollar. The yuan is currently trading at around 7.12 to the dollar in the onshore market, after weakening in July.
PBOC’s tools to stimulate currency stability: In light of expectations of a stronger yuan, the PBOC is using several tools to influence market expectations and promote currency stability.
Strengthening the yuan and the impact of US interest rate cuts
The yuan strengthened after Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole Symposium on Friday, where he suggested that it was time for the U.S. interest rate to be cut. The remarks are seen as a major catalyst for the yuan’s strength, as they signal a potential shift in U.S. monetary policy that could have a significant impact on global markets.
Actual Rate Cut Impact on the Yuan : Despite the positive comments, the yuan is unlikely to make immediate gains after the Fed’s first rate cut. It may take time for the full effects of the rate cut to become apparent. This could happen when the dollar weakens significantly under a soft landing scenario, where U.S. inflation declines without causing a recession.
Dollar and Yuan Impact Outlook : He notes that a Fed rate cut could have a delayed impact on the dollar. Under a soft landing scenario, Jin expects the dollar to weaken more quickly as the yuan strengthens. This could further strengthen the yuan, reflecting the Chinese currency’s role as a major factor in global markets.
Forward-looking Outlook : The outlook remains contingent on the U.S. economic situation and monetary policy developments. Markets may need time to fully assess the impact of the rate cut on the dollar and yuan. Meanwhile, the yuan is strengthening on expectations of future US monetary policy, which could contribute to significant changes in value in the coming period.
The yuan continues to strengthen on the statements of the US rate cut. Although the actual impact may take some time to fully manifest, expectations indicate that the dollar may see a significant decline in the soft landing scenario. This development highlights the importance of monitoring the Fed’s policy and its potential impact on global markets.
Upward pressure on the yuan and future implications
The yuan is strengthening amid expectations that the US Federal Reserve will cut interest rates. He agrees with this view, noting that such a cut could strengthen the yuan by as much as 10%. This forecast is also in line with the views of Guan Tao, a senior economist at Bank of China International Limited, who believes that the yuan could see a sharp rise if the scenario of the yuan-linked “carry trade” collapses repeats.
The impact of the yuan-financed “carry trade” collapse: Jin points out that the collapse of the yuan-financed “carry trade” could create significant pressure on markets, much like the impact that markets experienced after the yen’s carry trade collapsed. The carry trade involves borrowing a currency at low interest rates and investing it in higher-yielding assets. If the yuan-linked carry trade collapses, it could spark panic in Asian markets, putting significant pressure on the value of currencies and financial markets in the region.
The People’s Bank of China’s ability to handle volatility: Despite expectations of a stronger yuan, Jin points out that the People’s Bank of China has the ability to manage large volatility. Beijing has always been wary of sharp appreciation of the yuan as it could negatively impact export competitiveness and hamper economic recovery. China’s foreign exchange regulators are already monitoring the impact of a strong yuan on exporters, as large increases in the currency’s value could weaken the competitiveness of Chinese exports in global markets. While some strategists see a “carryover” trade focused on a weak yuan still making sense given the divergent economic fundamentals between China and the US, markets remain on tenterhooks. The situation requires close monitoring of the impact of US monetary policies on the yuan and global financial markets.
The impact of Chinese and US yields on the yuan’s movement
Although the spread between Chinese and US yields has narrowed slightly recently, the spread remains relatively wide. This large spread in yields may discourage Chinese companies from selling their foreign exchange reserves anytime soon. The disparity in yields also increases the attractiveness of US dollar assets compared to the yuan, which could affect the timing and flow of funds in the market.
Estimates of the size of Chinese corporate reserves: Macquarie Group estimates that Chinese exporters and multinational companies have accumulated more than $500 billion in dollar holdings since 2022. Australia and New Zealand Banking Group Ltd. estimates the figure at $430 billion. These large dollar holdings represent a significant source of pressure that could affect the value of the yuan when any US monetary policy moves are made.
Future pressure on the yuan: There is significant “pressure” for the yuan to rise, especially if we assume that a large portion of the reserves, estimated at around $1 trillion, could move after a US monetary policy adjustment. This could lead to large market movements and significantly boost the yuan. The impact of the People’s Bank of China’s intervention
The yuan’s appreciation could be greater if the People’s Bank of China refrains from intervening to absorb dollar liquidity. Jin said in an interview last week that the central bank’s non-intervention could help fuel the potential appreciation of the yuan. Analysts suggest that lower US interest rates could encourage Chinese companies to sell their dollar-denominated assets, which could boost the yuan’s value significantly. Jin expects the yuan to appreciate by as much as 10% if such large capital outflows occur. The forecast also points to a possible decline in the value of the US dollar, which would strengthen the Chinese currency’s position in global markets.
