China Is Getting Ready for a World Without Trump

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China Is Getting Ready for a World Without Trump

 

Shuli Ren

Sun, November 1, 2020, 6:24 PM EST·4 mins read

 

 

(Bloomberg Opinion) -- In less than a month, two unusual things happened at the People’s Bank of China.

First, it no longer required banks to set aside cash if clients wanted to short the yuan. This makes betting against the currency cheaper, and allows room for the yuan to weaken. Second, the PBOC removed the so-called counter-cyclical factor, one of the three elements used to determine its daily currency fix, which guides trading. These significant tools were set up in 2015 and 2017 to stem the yuan’s free fall.

Last quarter was the yuan’s best in more than a decade. Now Beijing needs to prevent the currency from strengthening too much, particularly with the increasing odds of a Joe Biden White House. Whatever position the Democratic candidate takes toward China, his policies are certain to be more predictable than President Donald Trump’s. That would be a good thing for the yuan. In fact, currency traders had preempted policy makers, piling into the yuan as the odds of a blue wave rose.

 

Over the past two years, China’s currency has been whipsawed by volatile geopolitics, while traditional valuation metrics, such as the current account surplus and interest rate differentials, went to the back burner. Now that Trump appears to be on his way out, and China’s economy is growing again — with parts of Europe and the U.S. resuming lockdowns — the yuan’s outlook is rosy.

Reining in excessive currency volatility will be critical if Beijing wants to keep a steady inflow of foreign money. Lured by yield, investors abroad have been buying China’s sovereign issues at record pace, promising to overtake city commercial banks as the second largest purchasing bloc this year. If the yuan becomes a plaything for speculative traders and overshoots, long-term investors will have to worry about currency hedging and may well stop coming, especially when the market seems to believe that a Democratic victory will result in higher Treasury yields. The 2.4% interest rate differential between China and the U.S. may narrow.

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