Investing.com – The is “undervalued and highly competitive,” giving Beijing the ability to let the currency appreciate while still remaining an export-driven powerhouse, according to analysts at BCA Research.
Prior to the Lunar New Year holidays earlier this month, China’s offshore yuan had spiked to its strongest levels against the U.S. dollar in nearly three years, reflecting a recent decline in the greenback that has sparked questions around the longevity of its status as the world’s reserve currency.
Chinese President Xi Jinping, meanwhile, has called for the yuan to be a “powerful currency” that can be used more frequently in global transactions and world reserves. At the same time, U.S. President Donald Trump has argued that a weakening dollar is “great,” as such depreciation could help right perceived trade imbalances.
In a note, the strategists including Chester Ntonifor and Marko Papic said that the yuan’s strengthening can allow China to gradually shift from a heavy reliance on exports toward stronger domestic consumption, which has been recently tepid as the country’s grapples with a protracted real estate crisis.
They added that a stronger yuan could narrow the China’s capital account deficit and help anchor a move by Beijing to divest away from the U.S. to “gain greater sovereignty.”
“On exports, the global trade pie is expanding. With a competitive currency, China will be fine,” the analysts wrote. “By the same logic, given the CNY’s competitiveness and our view that investors will pivot to buy the rest of the world, capital should rotate into Chinese domestic companies with some international exposure. Even if we are only half right, and China becomes Asia’s monetary anchor in place of the dollar, you will want to be overweight the Chinese yuan.”
Against this backdrop, they argued that “the trade for the next few years is long ,” but said they will rotate into other currency pairs as global markets increasingly recognize China’s competitiveness.
