China Construction Bank sells US$3 billion worth of debt on blockchain

Blockchain has made issuing conventional financial instruments, such as equities and bonds, possible at much lower costs as fewer financial intermediaries are involved in the process.

The bond will be sold in the form of certificates of deposit, which are usually sold at several tens of thousand yuan each and attract mainly professional investors or other banks. They are often used for interbank funding, specifically for small to medium-sized banks in China.

The fact that yield differentials have favoured the yuan, as the PBOC took a more nuanced approach to monetary policy support than many other central banks, has also played no small part in enhancing the renminbi’s allure.

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This prevailing wind may blow a while longer. Noting the possibility of an improvement in China-US trade relations, and feeling that “Chinese exporters have yet to restore their [foreign exchange] conversion ratios to levels seen before trade tensions, so they still have excess [US dollar] savings to unload”, HSBC reassessed its view on the yuan last week. It lowered its first-quarter 2022 forecast for the US dollar/Chinese yuan exchange rate to 6.40 from the previous 6.60.

HSBC also made the point that China’s current account surplus continues to underpin the yuan’s value.

Even without a pandemic, rebalancing an economy the size of China’s would be no easy task. But that’s what Beijing aims to do. Monetary policy support from the People’s Bank of China will help keep Chinese economic growth on track. The yuan also has a part to play, but it will be a changing role.

The currency market may choose to recalibrate its view of China’s currency in 2022. Yuan strength could then begin to wane.

The prevailing wind in the currency market has been behind the yuan in 2021, lending it strength even as the Chinese economy has been navigating troubled waters amid problems in the property sector, an energy crunch and the resulting power cuts and, most recently, an uptick in Covid-19 cases.

To a large extent, present renminbi strength is a reflection of the foreign exchange market’s view that, despite China’s own problems, it is still a better bet than a lot of other economies

Meanwhile the pandemic-related absence of outbound tourism from China, which necessarily results in selling of the renminbi, continues to remove a factor from the equation that would ordinarily weigh on the value of the Chinese currency.

Additionally, the strong yuan is a useful ally for Beijing in partially offsetting the impact of increases in US dollar-denominated energy prices that have been evident globally in recent months.

To the extent that yuan strength seems to currently suit Beijing, but where China’s economic interests seem best served by continuing with supportive monetary policy settings, the PBOC will have to make deft use of the policy levers at its disposal.

With that in mind, as other major economies appear on the cusp of tightening monetary policy that will erode yield differentials currently favouring the yuan, the PBOC might be inclined to avoid exacerbating the situation with cuts in China’s reserve requirement ratio in the coming months. Rather, it may prefer to use liquidity injections to support the economy.

The fact is that, with rising consumer price inflation having become an issue in economies such as Australia, Britain, Canada and the United States, it is now just a question of how far, rather than whether, their central banks will tighten monetary policy.

As yield differentials that have previously favoured the yuan narrow, the currency market might logically infer that there are more reasons to hold the currencies of countries such as the US that have tightened monetary policy, and, by extension, fewer reasons to hold the renminbi.

Higher yields on US Treasuries also mean lower prices for those same bonds. If, along with this process, markets also perceived that China-US relations were on the mend, they might also envisage a situation where Beijing again becomes an active Treasuries buyer.

That could then add a layer of support for the US dollar versus the renminbi. It might even suit Beijing and Washington to allow such a perception to build.

On the assumption that either an increase in energy supply or – less welcome economically – evidence of energy demand destruction will eventually curtail the fossil fuel inflationary pressures, then going into 2022, policymakers are likely to turn their attention to how to take advantage of any normalisation in global economic activity.

In such circumstances, Beijing might feel that China’s still-critical export sector could benefit from a degree of yuan weakness without it harming the Chinese economy as a whole. Meanwhile, Washington might see a degree of renminbi weakness, at least temporarily, as a price worth paying to obtain some imported disinflation.

All currencies wax and wane, even the yuan. Next year might see the renminbi wane a little.