Taken in totality, we believe that the Chinese leadership is committed to regionalizing and ultimately internationalizing the Chinese yuan. In order to continue down the path of liberalization confirmed by the Third Plenum, this most recent move to widen the band implies that the Chinese leadership is confident that the economy is strong enough to proceed with reforms. While this most recent widening of the band will inevitably lead to higher volatility for the yuan, we still view the currency as an attractive long-term holding.
Additionally, a big development last year was the increased yuan use for purposes of trade settlement. However, in some respect increased volatility flies in the face of broader use, and increased volatility could give pause to Western buyers accustomed to transacting in dollars. In our view, this trend of increased use in global trade will continue in 2014. China and its interests may simply be too large to ignore.
Recent Developments from the National People’s Congress
Each year, the Chinese party leadership assembles to set the economic and social targets for the year. For 2014, there was some conjecture that China may reduce its official 7.5% growth target given the potential “rebalancing” under way in the domestic economy. However, early reports suggest that China is committed to maintaining the 7.5% target. While greater details about future policy changes continue to trickle out, support for the growth target represents a clear positive for broader emerging market sentiment that has come under pressure over the last 12 months.
Conclusion
Although volatility may be poised to increase going forward, we believe that the Chinese yuan represents an attractive opportunity for returns in 2014. Given that a gradual appreciation of the yuan is also in China’s best interest as the country transitions toward a domestic demand-driven economic model, investors’ interests remain aligned with policy makers’.
1Source: Bloomberg, as of 12/31/13.
2Or that the yuan wouldn’t continue to slowly appreciate against the dollar in perpetuity.
3Also referred to as the offshore yuan market.
4Source: Standard Chartered, 1/7/14.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Investments focused in China are increasing the impact of events and developments associated with the region, which can adversely affect performance.