On Wednesday, the yuan — also known as the renminbi or “people’s currency” — rose to a record post-float high, as the dollar fell to 6.3772 yuan on mainland Chinese markets, according data from the state-run Xinhua News Agency.
However, plunges in global stock markets and for many commodities on Thursday sent the Chinese unit back down, with the central bank’s dollar “parity rate” — the midpoint of the government-set trading range for the domestic market — rising to CNY6.3808 Thursday and CNY6.3840 on Friday.
China's currency and government bonds offer investors a unique way to take advantage of the country's continued strong economic growth.
But in offshore trade in Hong Kong, the yuan’s fall was more significant. There, the dollar jumped to CNY6.56, creating a rare case in which the yuan in Hong Kong traded at a discount to that on the Chinese mainland, according to data reported by Reuters.
The yuan isn’t freely convertible outside of China. Some foreign investors seeking exposure to the currency trade in non-deliverable forwards (NDFs), which offer a hedge against yuan moves but without any physical yuan trading hands.
On that market, the one-year future traded at CNY6.42 midday Friday, off an earlier higher of CNY6.47 but above the mainland spot rate, implying that the market believe the yuan will fall further, according to price quotes reported by Dow Jones Newswires.
However, some currency strategists said the discount was related to a massive unwind of non-dollar investments and the price differential would likely prove temporary when markets settled down.
“People are trying to reduce whatever positions they have globally, and part of that is in Asian foreign exchange,” said HSBC Asian currency strategist Perry Kojodjojo in Hong Kong.
“When global risk markets stabilize, people will start buying,” Kojodjojo said, referring to the Chinese currency traded in Hong Kong.
Other analysts also saw the longer-term picture for the yuan as strong.
“I think this is the new safe haven,” said Credit Agricole senior economist Dariusz Kowalczyk in Hong Kong. Kowalczyk cited the strength of the Chinese economy relative to that of the West.
“If you still have cash, then I would definitely keep it in assets of very low risk,” he said. “Here in Hong Kong, find a bank that allows you to open a bank account in [mainland] China and get the Chinese interest rates.”
China allows transfers of up to CNY20,000 per day from mainland bank accounts to authorized accounts at Hong Kong banks.
HSBC’s Kojodjojo said Chinese authorities could bring back a temporary peg to the greenback, much as they did for a nearly two-year stretch following the previous global crisis.
More likely, he says, China will maintain a slow appreciation of the Chinese currency of about 5% annually.
“I think China’s growth story and what happens to the renminbi in the future remains very much in tact,” said Kojodjojo.
Still, others said China might face a more difficult time ahead if the global economy tips on a synchronized downturn.
Daiwa Capital Markets said they see a 25% chance China could suffer a hard landing in the coming quarters, defined as an annual GDP growth rate below the 8% considered necessary to create jobs for millions of rural migrants flocking to mainland cities.
Daiwa economist Kevin Lai said it was possible that the Chinese currency will undergo an extended period of zero gains or minor losses while the U.S. dollar undergoes a multi-year rally.
“The yuan could weaken a little bit because of the dollar strength, but not substantially,” Lai said. “It may just take a break.”