It’s China’s World, We Are Just Living in It
Updated: Oct 27, 2020
After months of bleak news, most of the world may be counting the days for this year to finally end. In Europe, the feeble recovery after promising summer months seems to be dying down. Happy days look far away as the government braces for a second wave and lockdowns loom again. Across the Atlantic, the US has battled through mass protests and is duly trying to get through their first-round with COVID once they determine whether wearing a mask is a political statement, or not. However, their way to recovery has been slumped by an ineffective political and economic response in both houses of congress. Meanwhile, China is trending… for all the right reasons.
The sun is shining in Beijing. China has achieved a steady economic recovery since the coronavirus crisis and seems to have eluded the dreadful relapse of the virus. Additionally, their fiscal-led way to recovery has maintained their interest rates relatively high. So, it is no surprise that demand for Chinese assets has been booming.
Foreign investors have been attracted to Chinese debt because of their high yield relative to plummeting interest rates across developed economies. Chinese government bonds have yields close to 2.7 per cent whilst US equivalents offer only a yield of 0.8 per cent. The difference has driven foreign investors to renminbi backed securities en masse, buying a total of $90bn in the year to August.
Inflows have been further encouraged by the People’s Bank of China who have allowed the yuan to its highest rally in 15 years and analysts suggest it will continue to appreciate in the coming months. The change in attitude has reassured investors and points to a move towards a more liberalized exchange rate based on market forces. This is in stark contrast to last year’s hefty depreciation of the yuan to its lowest point, in the developments of their trade war with the US. However, as of October, there are numerous reasons for China to be happy.
The increasing likelihood of a Biden win in November provides an even more positive outlook for China. The promise of smoother Sino-American relations with an administration that won’t be using trade as a weapon in negotiations has boosted the yuan’s climb.
The conditions all appear to be converging in Beijing at the moment and contrary to everyone's experience this year, it looks like China has smooth sailings ahead. Analysts estimate that the inclusion of their bonds into the world’s largest government bond index could add $140bn in foreign inflows. And there is no sign of stopping, as the increasingly liberalized Chinese markets have signalled the intention for the yuan to gain more importance in international circuits and as a reserve currency.
Image thanks to Sporcle. Accessed 17th October 2020. https://www.sporcle.com/blog