MNI INTERVIEW: Yuan To Ease As Factors Support Dollar-Advisor

China's yuan could lose steam against the dollar as safe-haven sentiment grows for USD assets amid the accelerating Russia-Ukraine war and capital may flow out of China as financial markets move from the temporary shocks and turn to bet on the further recovery of the U.S economy in the second half of the year, a high-ranking policy advisor told MNI.

The yuan has shown strength so far this year on offshore flows into yuan-denominated assets to shield from geopolitical risks, said Li Daokui, a former advisor to the People’s Bank of China. He attributed the quasi-safe-haven currency performance of the yuan to the effective recovery of the Chinese economy from the pandemic and as policy room was created for uncertainties, see: MNI: Yuan Seen Benefitting From Russia Flows, To Weaken Later.

A LONG WAR

However, if the war is prolonged, knee-jerk market reactions may fade and capital would turn to fundamental factors, such as a comparatively robust U.S economy, which would benefit the dollar, he said. Li, a member of the Chinese People's Political Consultative Conference, however said China is in a “relatively insulated position” when discussing the impact of the war on the world's second-largest economy.

China's yuan neared 6.3 to the dollar in the early of this month but started to weaken in recent trading days as the Russia-Ukraine intensified and investors are rushed to safer alternatives including the USD and gold. The PBOC set the CNY fixing weaker in the past two consecutive trading days with 6.3478 the weakest since Feb. 22.

U.S. ECONOMY AND CRUDE OIL

Robust U.S. economic growth this year will also likely pull more investment back along with Fed rate hikes, Li said. China on the other hand is on track for easier monetary policy and supportive fiscal spending, Li added. China's economy is forecast to grow at around 5.5% this year, a somewhat slower pace than recent historical trends.

But Li said China would gradually relax zero-Covid measures by reducing quarantine times for foreign visitors as evidence shows the Omicron variant virulence has eased.

Ahead, Li said China’s policymakers are prepared for the impact of U.S.-led financial sanctions on Moscow for its invasion of Ukraine and the resulting surge in prices for crude oil and other dollar-denominated commodities that pressure producer and consumer costs. Benchmark Brent prompt crude futures reached a high of USD139.13 a barrel on Monday, up nearly 18% from the pre-weekend close on discussions from some countries to bar imports of oil from Russia.

The energy trade between China and Russia however is still on track, Li said.