MNI INTERVIEW: China Yuan To Find Support in H2

The yuan will find support in the second half as the U.S. dollar weakens following Federal Reserve rate cuts expected by September and policies designed to boost the Chinese economy take effect, a prominent currency policy and yuan globalisation expert told MNI.

Global monetary policy will broadly tilt dovish as the Fed eases and China’s financial cycle will converge with other major economies, creating benign external conditions for the yuan and capital inflow, said E Zhihuan, vice-president at Research Institute of Bank of China. CNY will likely remain strong against the basket of currencies over the remainder of 2024, she told MNI in an interview.

Better-than-expected export performance will also improve demand for the yuan and risk premium, however, the pair’s volatility will increase, she noted. (See MNI: PBOC To Allow Yuan To Drift Lower-Advisors And Traders) Over the longer term, CNY will trend stronger against the dollarand authorities will ease forex policy, widening the trading band, she predicted.

Beijing wants a strong currency to help build “financial power”, which requires the yuan to remain stable domestically and externally credible. (See MNI INTERVIEW 2: China Needs Strong Yuan To Support Imports)

E explained value stability is the cornerstone of international credibility. A stable, stronger yuan will also benefit its internationalisation in all settlement, pricing and reserve functions, she added.

E has studied and advised on China foreign exchange policy and yuan internationalisation policy for over a decade and has held the chief economist role at the Bank of China (Hong Kong) since 2016.

USDCNY traded at 7.2576 in the morning session on Thursday and has risen 2.08% YTD.

COMMODITIES PRICING

China’s growing commodities buying power will boost the yuan’s global use, but up and downstream use of the greenback along the supply chain means the dollar's dominance will remain for the foreseeable future, E argued.

In addition, apart from the euro, liquidity of other non-dollar currencies and the variety of financial products in offshore markets maintains insufficient to meet trader demands for conversion, hedging and forex trading that come with commodity transactions, she noted.

China will further develop its futures market by improving the regulatory framework and aligning exchange rules with international standards, while introducing products that target new energy and carbon-emission rights besides futures and options contracts for key commodities, she said.

China will also support the development of yuan-denominated quotations and trading products for commodity markets, offshore futures transactions, and enrich asset and risk-management tools to ensure CNY circulation, she predicted.

YUAN INTERNATIONALISATION

Increasing yuan demand will boost the currency’s global role as the international monetary system diversifies, thanks in part to China’s work with Belt and Road Initiative countries and regional organisations such as the Regional Comprehensive Economic Partnership, E added.

China will push steady internationalisation through improved cross-border trading infrastructure and the promotion of innovation in free trade zones and the Greater Bay Area, while increasing the openness and accessibility of financial markets to add liquidity to CNY financial assets, she said.

The People’s Bank of China will also deepen monetary cooperation to make the yuan more active in bilateral local-currency settlements, direct trading and currency swaps, she said, noting Hong Kong will play a crucial role as the mainland’s capital account will not fully open in the foreseeable future. Authorities will therefore look to expand the Connect Program between Hong Kong and the mainland, improve offshore yuan liquidity and enrich CNH risk-management tools.

However, internationalisation will be a long-term project despite CNY becoming the world’s fourth largest payment currency last year, she added.