Insights

We have long argued that the core fundamentals of the Chinese Yuan (CNY) are robust and resisted the fashionable call in the market a year ago for the CNY to depreciate or be devalued. We strongly argued at the time that Beijing is not of a mercantilist mindset as many commentators were stating, and that the economic fundamentals of China, both cyclical and structural, suggested a positive medium-term trajectory when compared with the USD or the EUR. In October, the People’s Bank of China (PBoC) lowered the risk reserve ratio for FX forward trading from 20% to 0%, as well as removing the countercyclical factors. Instead of an expression of the PBoC’s concerns of the recent RMB appreciation, we believe the actions represented China’s campaign to promote the RMB internationalization and to entice foreign institutional investors to invest big in China’s financial markets. As a key part of the multi-year plan, China is going to make the Chinese financial markets more balanced, in that foreigners must have a certain level of ownership in Chinese assets. One reason is that China is short of hard currencies: it no longer runs a meaningful CA surplus that allows them to expand overseas. At the same time, there is huge pent-up local demand for foreign assets (which we estimate to be in the range of USD4-5 trillion now). The solution is to engineer a counter flow of the same size by inviting foreigners to invest in China. This was why China accelerated financial sector reforms and liberalisation.

Over the medium to long term, although there will be ups and downs for all currencies, we believe the relative performances of the major currencies will likely be CNY > USD > EUR. On the CNY side, we suggest the PBoC is the ‘Bundesbank of Asia’, in light of its philosophy and its prudent restraint in resisting printing money. In addition, the latest Five-Year Plan should lead to meaningful structural upgrades in China’s real economy and the financial sector. As a result, we think the CNY will perform like the ‘Deutsche mark of Asia’, and will be favourable to the other major currencies. On the EUR side, despite the heightened emotions and the significant speculative positions in EURUSD, we should be reminded that, since the inception of the euro, EURUSD has traded within roughly a range of 0.80 at the low and 1.60 at the high. At 1.17, we are very close to the mid-point of this range and the ‘IPO’ rate of 1.17 in January 1999. The latest hype about global central banks falling in love with the European Recovery Fund and the new debt issued by Brussels seems mis-placed in our view, both in terms of the scale of the likely new issuances and how the reserve managers around the world make their allocation decisions. In sum, we believe the EUR’s out-performance in the past few months will likely turn out to be transitory, and the real out-performer may be the CNY.

The above article is an extract from our regular fund manager commentaries.
To subscribe to our fund manager commentaries, please email sales@eurizonslj.com

Disclosure

None of the contents of this document should be understood as constituting research on investment matters, or as a recommendations, advice or suggestions, implicit or explicit, with respect to an investment strategy involving the financial instruments discussed, or the issuers of the financial instruments, nor as a solicitation or offer, nor as consulting on investment matters, of a legal, fiscal, or other nature. All the companies of the Intesa Sanpaolo Group, its administrators, representatives, or employees, decline any responsibility (fault-based or otherwise) deriving from indirect damages potentially caused by the use of this communication or its contents, or in any case deriving in relation to this document, nor may they be consequently held liable for any of the above. The information provided and the opinions contained in this document are based on sources considered reliable and in good faith. However no declaration or guarantee is offered by Eurizon SLJ Capital Limited, explicitly or implicitly, on the accuracy, exhaustiveness and correctness of the information, and there is no guarantee that results, or any other future events, will be compatible with the opinions, forecasts, or estimates contained herein.

Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

ESLJ-111120-I1

Our Research

Our written research products aim to provide unique and orthogonal insights on key global economic and policy issues in a timely fashion.

Aerial view of forest during  colourful autumn season.