Strategy Note / Global

China Renminbi strength means competitiveness gain for India and smaller Asia EM

  • CNY has appreciated 9.5% from its 29 May trough and is up over 2% in November to date alone
  • Drivers of strength likely persist (eg faster growth than US, loose US policy, China's high positive real interest rate)
  • Taiwan and S Korea FX has also strengthened; but competitiveness gains for India and small Asia (eg Bangladesh, Vietnam)
China Renminbi strength means competitiveness gain for India and smaller Asia EM

Recent Chinese Renminbi strength

The CNY has appreciated 9.5% since its most recent trough on 29 May 2020. In November to date alone it is up over 2%. H1 18 peaks were another c4.5% higher.

China's real effective exchange rate (REER) is 125, which implies c20% over-valuation (on an absolute basis) and c5% relative to 5-year median REER.

But the current account is in surplus (0.7% in 2021, according to IMF forecasts) and FX reserves are equivalent to about 22 months of imports.

Key appreciation drivers likely persist

Recent CNY strength versus US$ has been driven by the factors listed below, most of which likely persist.

  • Expectations of faster growth in China than in the US (eg 8.2% in 2021 versus 3.1%, according to IMF forecasts).

  • Portfolio inflows to China (driven by 3.3% local currency 10-year bond yield compared with under 1% for US 10-year, FTSE bond index inclusion, and 3.4% real interest rate).

  • Looser US monetary policy and the prospect of further US fiscal expansion.

  • Less "flight to safety" appetite for US$.

  • Fewer outbound Chinese tourists during Covid-19.

While CNY appreciation erodes export competitiveness, it also encourages consumption imports at a time when the authorities prefer a shift from an export to a consumption-based economy.

Implications for EM equity investors

China-HK is the largest weight in the MSCI EM index (c41%). The next two largest are also two of its main competitors in Technology Hardware exports – Taiwan and Korea (each about 13% of the index). While China's FX rate has appreciated significantly year to date, so have those in Taiwan and Korea, each by about 5% – see chart below.

However, the FX rate in India (8% of MSCI EM) is down almost 4%; equating to over a 10% gain in competitiveness versus China compared to the start of the year, all other factors being equal. A number of smaller Asia exporters have also seen competitiveness gains, eg c5% gains for Bangladesh (garments) and Vietnam (Tech Hardware and Garments).

For EM investors, China's currency strength (translation gains on Chinese revenues for ADR stocks, translation gains on share price performance for locally-listed stocks) offsets some of the increased regulatory risks (in both the US and China) facing the Technology Application companies which dominate the index (about 40% of MSCI China).

Related reading

China tries to restrain Renminbi but drivers of strength persist (October 2020)

US Dollar: Recent weakness, drivers up and down from here (Jul 2020)

US Dollar as reserve currency after Covid-19? A moot point for EM ex-China (Apr 2020)

China manufacturing is irreplaceable but India and other Asians can win share (June 2020)


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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

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