MNI: Yuan Seen Benefitting From Russia Flows, To Weaken Later

China’s yuan is benefitting from safe-haven flows from global investors including funds from Russia which could push it to fresh 2022 highs, but the short-term boost will not reverse a likely depreciating trend for the currency over the year as a whole, forex traders and analysts told MNI.

As Russia is a member of the Shanghai Cooperation Organisation, flows into the yuan from roubles are facilitated, noted Tan Yaling, head of the China Forex Investment Research Institute, adding that Chinese assets seemed to be serving as a safe haven, in contrast to those of most emerging markets. The yuan’s recent strength has also attracted speculative investors, she said.

The yuan could break 6.30 to the dollar in the short term if the Russian inflows jump, a trader at a big bank told MNI. The yuan weakened to 6.3234 against the dollar Thursday from 6.3178 Wednesday, near a four-year high for the Chinese currency. The PBOC set the dollar-yuan central parity rate lower at 6.3280, compared with 6.3313 on Wednesday.

FED HIKES

Russia could increase its holdings of yuan-denominated assets, and reallocate foreign reserves in response to sanctions, according to China International Capital Corporation. But higher world energy prices prompted by the conflict in Ukraine could have a negative impact on the yuan, though smaller than that on other Asian currencies, it noted.

Later in the year the yuan is still likely to weaken as the Fed hikes rates, said Tan, predicting it would trade mainly between 6.3 and 6.5.but could depreciate as far as 6.8 at some points. The People’s Bank of China would like to see a wider range for the currency, tilting towards moderate depreciation, she said.

Lian Ping, chief economist at the Zhixin Investment Research Institute, saw the yuan in a range of 6.2-6.7 against the dollar this year, though the usual market forces such as Fed tightening and the narrowing U.S.-China interest rate spread have hit the currency less than in the past. Geopolitical factors and a likely fall in the Chinese trade surplus could also add to the pull of depreciation, he said.