![]() ![]() ![]() These effects could significantly worsen, if the assumption that Omicron is the last hold of the pandemic proves flawed. Moreover, the Fed and other major central banks have consistently underestimated the persistence of inflation, which was initially seen as merely “transitory.” Political violence then or in 2022 can no longer be excluded. Political polarization is likely to escalate, particularly by the U. Consequently, the supply disruptions and labor shortages that most countries have seen in the past months will not diminish overnight. reported almost 1.1 million new daily COVID-19 cases, a new global record. Only days later, the Fed indicated it would end its pandemic-era bond purchases in March, thus paving the way for two to three interest rate hikes by the end of 2022.Īfter the new year, the U.S. inflation surged to near 40-year high, at 6.8%. The gap could increase if the PBOC decides to tighten (Figure 3).įigure 3 The Yield Difference: US and China Government Bonds (10Y) The Chinese government bond is currently around 2.8% and could climb to 2.95% in 2022. The former has traded around 1.6% and is expected to rise. As the PBOC has signaled, the yuan may face a rougher ride in 2022, due to normalization by overseas central banks.Īlso, higher interest rates could narrow the yield spread between U. A more hands-off stance toward the exchange rate fosters appreciation. Last October, the PBOC stated it was phasing out the use of the countercyclical factor, launched in 2017 to contain yuan’s depreciation. What complicates assessments of potential dollar-yuan decoupling is the impact of pandemic uncertainty on monetary policies and rates. FDI into China is also likely to be resilient, due to capital inflows from the Belt and Road and ASEAN economies. In relative terms, FDI into China from the Belt and Road (25%) and ASEAN economies (24%) surged even faster, according to data by China’s Ministry of Commerce.Įven if the Fed’s rate normalization will reduce capital flows to Chinese markets, the continued opening of the mainland’s financial sector may offset some of the pressure. Meanwhile, overseas investors have raised their holdings of mainland stocks and bonds by over 11% since the end of 2020, according to data by the People’s Bank of China (PBOC).įoreign investment was strong (17%) in the first 11 months of 2021, including into the service sector and particularly advanced technology (19%). In the first three quarters of 2021, China’s actual utilization of FDI climbed to almost $130 billion (25% year-on-year). trade war (Figure 2).įigure 2 China’s Trade Balance (2012-Present)ĭecoupling has been reinforced by strong capital flows, thanks to China’s encouragement of foreign direct investment (FDI) and further opening of capital markets. Overall, the drivers of the trade surplus have narrowed, although it remains strong in a 10-year perspective, despite the U. Export growth has slowed on the back of a stronger yuan, and weakening demand due to the Omicron wave and higher costs. Yet, imports grew even faster to $254 billion (32%). In November, exports exceeded $300 billion for a third straight month (22% from the previous year). The yuan’s recent appreciation has been explained on the basis of China’s strong export performance. There are multiple central economic drivers behind the current decoupling, particularly trade balance. trade wars and pandemic mismanagement (Figure 1b).įigure 1 Decoupling Yuan-Dollar Relationship The dollar soared after the 2015 Chinese market correction until the self-induced double-whammy: U. It was preceded by another in the mid-2010s, when the Fed began its gradual exit from ultra-low rates. Nonetheless, the current divergence is not the first of its kind. And sure enough, the yuan seems to mimic the dollar’s trajectory until late September 2021, which is followed by significant divergence (Figure 1a). It was visualized with a 1-year timeline. Dollar Index (DXY), which reflects the value of the dollar relative to a basket of currencies of some of America's biggest trading partners.Ĭaixin traced the decoupling back to September 2021. After all, the relationship between the yuan and the dollar has been relatively consistent since the mid-2010s, as measured by the U. ![]() The Caixin report attracted great attention internationally. ![]() The real story, however, is nuanced, complex and not just about currencies. The breakup was characterized as an “unusual currency decoupling, which has been evident since September.” In early December, Chinese business and finance media Caixin reported that the Chinese yuan has “broken its traditional relationship with the U.S. ![]()
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