• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Global Equity

Yuan's Rally Approaches Double Digits, Easing Washington Tensions

The Chinese currency has long been a point of complaint for the U.S., and its continued strength removes a distraction for incoming President Biden.
By ALEX FREW MCMILLAN
Jan 13, 2021 | 07:00 AM EST

Having shot up since the middle of last year, the Chinese currency has driven to its strongest level against the U.S. dollar in 18 months. The yuan has been remarkably one-directional, and appears set to continue strengthening.

The yuan is up 9.4% since the start of last June. At C¥6.46 to the U.S. dollar, it is well on its way to its strongest-ever level, when it came close to breaching the C¥6.00 mark in mid-2014. It stood at C¥7.14 at the end of May.

The gains magnify, in local currency terms, the effects of a stock market rally that saw the benchmark CSI 300 index advance 27.2% last year. An almost double-digit boost on top of that is nothing to scoff at.

The overriding factor is the continued strength of the economic recovery in China. Despite Wuhan - a central transit and industrial center that's roughly equivalent to Chicago - being the epicenter of the Covid-19 outbreak this time last year, China has got back on its feet economically far faster than expected.

This time last year, reports of the virus started to surface, shortly before the Lunar New Year. After the holiday, when millions of people traveled domestically and internationally, the virus hit in earnest, and the Chinese economy quickly ground to a halt. Shuttered stores and ghost-town streets became the norm.

Here in Hong Kong, we expected a devastating effect, both in business and personal terms. I'm not advocating the draconian lockdowns and total curtailment of personal freedoms that China deployed to combat the virus. But they did curb the virus, at least if you believe Beijing's official figures on infections. So too did the Communist Party's demand that factories resume production, whether management thought it was safe for workers to return or not.

For 2020, China's 2.1% growth in GDP was better than any other major economy in the world. Now it appears set for a 9.0% rebound in 2021, according to Nomura, which would spur the recovery in surrounding nations in Asia.

Unusually, Beijing appears perfectly happy with a stronger yuan. The benchmark interest rate stands at 3.85% at a time that most developed nations are keeping rates around zero. That encourages investors to put money to work in China, and benefit from higher yields, encouraging them to buy yuan assets in the process.

The traditional weakness of the yuan has been a perpetual problem in Washington. By keeping its currency low, China has been able to ensure its manufacturers are able to offer low prices internationally. A weak currency also makes it harder for Chinese consumers to buy U.S. goods.

The Trump administration in August 2019 labeled China as a currency manipulator, a move President Trump had long threatened to make. But it reversed course in January 2020, a major concession shortly before China signed the Phase 1 trade deal with the United States. The transactional nature of the Trump decisions shows that both the United States and the Chinese government were making political capital out of the yuan.

Some of the yuan's recent strength is relative. The U.S. dollar has been weakening at the same time that the Chinese currency has gained. The yuan is little changed now from its rate against the euro last June, while the euro has also gained 9.9% against the U.S. dollar since then. Dollar weakness looks set to continue as investors move money out of safe-haven currencies, and into riskier assets, emerging markets such as China being a prime destination for newly confident asset managers and owners seeking higher returns.

But in times past, Beijing would certainly take steps to counteract yuan strength, particularly against the U.S. dollar. The United States is China's largest trading partner, and was the destination for 16.8% of all Chinese goods sent around the world in 2019. A stronger yuan threatens that flow, and also makes it more expensive for U.S. manufacturers who had been making use of China as "factory to the world."

The stronger yuan advances two ambitions of the Beijing government. Beijing wants to encourage the development of the domestic consumer economy in China. Greater purchasing power lowers the sticker price on imported goods. Beijing is also terrified about currency outflows out of China, with most wealthy people doing their best to shift a large portion of their strongbox contents out of the grasp of the Communist Party. A weakening yuan had only encouraged the outward flow of assets.

Then there's the feel-good factor. Most politicians consider it a sign of strength to see their currency advance. China is also keen to encourage the international use of the yuan, which is hamstrung by China's strict currency controls. But the yuan will become more popular if it continues to deliver gains for holders of yuan assets.

Lastly, a stronger yuan is a subtle signal to Washington. Not having currency manipulation as a distraction could encourage incoming President Biden to take a more conciliatory tone on trade. Biden has said he'll prefer diplomatic alliances as a way of curbing China's rights transgressions and rising militarism, and will review the tariffs put in place by his predecessor. Yuan strength makes it more likely the most punitive tariffs, which ultimately lead to higher prices paid by U.S. consumers, may be lifted.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.

TAGS: Currencies | Investing | Markets | Stocks | Trading | China | Global Equity

More from Global Equity

Alibaba Shares Skyrocket in Hong Kong on Restructuring Plan

Alex Frew McMillan
Mar 29, 2023 8:00 AM EDT

The company will split into six separate entities which will be run under separate management and free to list independently.

Jack Ma Breaks Exile to Appear Inside Mainland China

Alex Frew McMillan
Mar 27, 2023 7:15 AM EDT

Popping up to discuss ChatGPT at a school he established, Alibaba's figurehead waves the 'patriotic' altruistic white flag.

Deutsche Bank Shares Are on the Ropes: Here's What the Charts Tell Us

Bruce Kamich
Mar 24, 2023 8:13 AM EDT

Traders are acting like traders -- sell first and ask questions later.

World's Biggest Unicorn Investor Is Acting Soggy

Bruce Kamich
Mar 21, 2023 1:15 PM EDT

Softbank's weakness is another sign of slowing economic conditions and restrictive monetary conditions.

How to Trade China's E-commerce PDD Holdings Now

Bruce Kamich
Mar 20, 2023 1:17 PM EDT

Previously know as Pinduoduo, weak consumer spending has plagued the stock.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 04:00 PM EDT CHRIS VERSACE

    AAP Podcast: This Solar Company Is a Head-Turner

    Listen to my interview with Brian Roth, CEO of sol...
  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • 08:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How to Adjust Your Trading Style as Market Conditi...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login