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Yuan has strengthened against USD over past 15 months
Chinese high-yield bond prices have tumbled since 2021
Rising cost of credit could lead to a weaker yuan
On one side of the Pacific coast, expectations have shifted to a dramatically tighter monetary policy in U.S. On the other, the People’s Bank of China (PBoC) continues to ease monetary policy. This might have set off expectations for the U.S. dollar to rise sharply versus the onshore and offshore Chinese yuan (CNY and CNH). But CNHUSD has strengthened slightly over the past 15 months (Figure 1).
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Figure 1: Up until 2020, CNHUSD usually tracked the PBoC’s monetary policy
So why has the Chinese currency, which normally strengthens when the PBoC raises rates and falls when it eases, decoupled from monetary policy? The answer appears to lie in the strength of China’s exports. Since the beginning of the pandemic, Chinese exports have risen more quickly than imports, and the resultant growth in the trade surplus appears to have supported CNH (Figure 2).
Figure 2: As demand for manufactured goods rose during the pandemic, China’s exports surged
The strength of Chinese exports reflects, in part, a shift in global consumption patterns during the pandemic. Less able to spend money on …