USD/CNY: Yuan to stay resilient in 2021 – HSBC

USD/CNY has shown some two-way volatility, amid higher longer-term US yields and uncertainty around US-China relations. In the view of economists at HSBC, the yuan will remain resilient this year, even when China’s economic outperformance is expected to narrow in the second half of 2021.

Key quotes

“USD/CNY has exhibited some two-way volatility lately, as higher longer-term US treasury bond yields have caused some debate on the outlook for the USD. We believe there is also uncertainty around how US-China relations could evolve under the new US administration. The Biden administration is said to be preparing to address China's unfair trade and investment practice, while the US still views China as its most important strategic competitor.”

“We do not expect significant CNY appreciation from current rich levels. Recently, Chinese authorities adjusted its FX policy, such as encouraging outflows and promoting more two-way portfolio flows. We have long argued that China’s capital account liberalisation will be two-way. Locals’ demand for external assets, once allowed by regulators, will be significant. The re-listing of American depositary receipts on the Hong Kong Exchanges and Clearing Limited (HKEx) and the potential launch of Southbound Bond Connect could both lead to large outbound investment.”

“We maintain our view that the yuan will remain resilient this year, while the level of USD/CNY in the second half of the year is expected to be slightly higher than that in the first half, as the yield differential between China and the US is expected to narrow.”

“The Chinese Academy of International Trade and Economic Cooperation (CAITEC), i.e., the research department of China’s Ministry of Commerce, commented that there is a high probability of USD/CNY rebounding to 6.50-6.80 later this year, once the US economy stabilises, and that a level around 6.80-7.00 could be considered a long-term equilibrium.”