China’s yuan has fared better than many other major currencies this year. It was down 6.5% against the US Dollar, holding firm as the Dollar experienced a dizzying rally.
The euro, the pound sterling and the South Korean won were all down more than 10%, while the Japanese yen was down nearly 16%.
But US House Speaker Nancy Pelosi’s controversial trip to Taiwan is reminding investors of the risks that come with holding the yuan.
What’s Happening: Pelosi’s high-profile visit to Taipei, where she said on Wednesday that Washington would “not abandon” the democratically-ruled island, stoked fears of a further deterioration in China-U.S. relations. , the two largest economies in the world.
Beijing quickly said it would launch live ammunition military exercises around Taiwan and suspended imports of natural sand and some fruit and fish. China is Taiwan’s biggest trading partner.
Rising tensions have fueled concerns among investors that the situation could escalate from here, intentionally or inadvertently. The Communist Party of China claims Taiwan as its own, despite never having controlled it.
China’s offshore yuan has retreated slightly this week.
“It’s something investors have known for some time as a potential flash point,” Manik Narain, head of cross-asset strategy for emerging markets at UBS, told me. “It has been very difficult to negotiate it. We don’t know if it will be a flashpoint tomorrow or five years from now.”
One big unknown: if China launched a military confrontation, would Western countries impose tough economic sanctions, as they did when Russia invaded Ukraine? What would that mean for foreign investors if they did?
“They can see what happened to Russian markets,” Narain said. “Investors don’t want to make the same mistake twice.”
Weeding China out of the global economy would be an almost impossible task given its integration with supply chains, the importance of the market to large Western corporations, and the country’s manufacturing power. But the threat of such a significant geopolitical collapse looms.
It is not the only factor weighing on the Chinese currency. Emerging markets are struggling to attract investment as US interest rates rise, making the idea of leaving money in high-risk locations less attractive.
There are also doubts about China’s economic growth. Factory activity contracted in July, according to data released last weekend. A global recession would damage the country’s robust export machine.
And domestic demand remains shaky as the country grapples with aftershocks from the recent Covid-19 lockdowns in major cities and a vulnerable real estate sector.
“At a time when exports are likely to soon lose steam with weaker global demand, the recovery in China’s domestic demand is unlikely to materialize anytime soon, in our view, given the ongoing Covid restrictions and recent shocks to the global economy. housing market,” said Helen Qiao and Miao Ouyang, economists at Bank of America, in a research note this week.
Also, as the economy falters, the People’s Bank of China is on track to loosen policy, while most other central banks are tightening it. This could increase downward pressure on the yuan.
“The pace at which the US raises interest rates could be crucial,” Narain said, noting the potential for a sharp “divergence”.
Source: CNN Brasil
I am Sophia william, author of World Stock Market. I have a degree in journalism from the University of Missouri and I have worked as a reporter for several news websites. I have a passion for writing and informing people about the latest news and events happening in the world. I strive to be accurate and unbiased in my reporting, and I hope to provide readers with valuable information that they can use to make informed decisions.
