In a year dominated by a resurgent U.S. economy and a focus on Fed “tapering,” the U.S. dollar became the primary focus for currency investors and equity investors alike. However, as strong as the dollar’s performance was against many of its largest trading partners, the Chinese yuan quietly appreciated by nearly 3%1. With positive momentum continuing into 2014, what is next for the Chinese yuan from a performance and policy standpoint?
As we mentioned in a previous blog post we believe that the path of gradual yuan internationalization and regionalization will continue over the next several years. As this trend continues, we believe that demand for the yuan and yuan-denominated assets may continue to grow. And we believe this strong demand will continue to be supportive of gradual yuan appreciation. Although fears about a slowdown in Chinese growth unnerved markets in early 2013, we believe that Chinese growth will reach the government-projected target of 7.5% on the back of strong exports this year. In 2013, the Chinese yuan held outside mainland China achieved several important milestones:
1. It rose to become the eighth most traded currency in the world2
2. It became the second most used trade finance currency behind the U.S. dollar in December 2013, displacing the euro3
3. Deposits of Chinese yuan outside mainland China have grown to an all-time record of CNH 1.15 trillion ($190.5 B) in Hong Kong, Singapore and Taiwan4
As impressive as 2013 was from a growth perspective, the Chinese yuan has proven remarkably resilient in its gradual appreciation over the last several years. In fact, last year, the yuan was the second best-performing currency in Asia (behind the Korean won) and the third best performer across emerging markets (also behind the Romanian leu).5 Among major economies6 only the euro outperformed the yuan in 2013. However, when factoring in returns from short-term interest rates, the yuan actually outperformed the euro on a total return basis.
Chinese Yuan Performance: 2005—2013