CHINA’S YUAN’S BETTER YIELD ATTRACTS FOREX MARKET PLAYERS
The Chinese renminbi’s accelerating transformation from a sleepy backwater of the foreign-exchange market into a currency fit to rival global peers has traders setting aside concerns about how much further it can go without reform and buying into its ascent, Susanne Barton and Robert Fullem reported for Bloomberg.
In London -- the world’s center of foreign exchange -- there’s more yuan changing hands than ever before. Options on the Chinese currency exceed those referencing the Japanese yen, and buying or selling the yuan is now as cheap as trading the British pound. There is a torrent of capital flowing into China’s markets, fueled by a frantic search for returns with over $14 trillion of debt globally paying less than 0%.
The shift comes as China continues to relinquish control -- albeit slowly -- of its tightly-managed currency, a linchpin of Beijing’s long-term plan to encourage its greater global use. China is considering easing restrictions on citizens investing in securities outside its mainland, a move that would facilitate two-way capital flows.
The so-called internationalization of the yuan is part and parcel of the government’s goal to wean itself off a reliance on the US dollar, and what some see as a geopolitical challenge to the greenback’s supremacy.
Reducing China’s reliance on the dollar has become more pertinent in recent years due to economic tensions with the US, a trend that will likely continue under the Biden administration.
Despite its still-small share of global trading -- 4.3% as of 2019, according to the latest data from the Bank for International Settlements (BIS) -- the yuan commands an outsized role in the foreign-exchange market because its daily moves serve as a key indicator of global investor sentiment.
Wells Fargo strategists including Erik Nelson argue that the Chinese currency may even be exerting influence on the broad dollar index.
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