China's Yuan and Interest Rates Strategy

China's rapid covid-crisis recovery has made it the leading destination for foreign direct investment, seeing an increase of over 4% in contrast to the US's 49% decline over 2020. The multi-billion dollar hike in government bonds further appreciated the yuan, while the PBOC seeks to balance the inflows by relaxing outflow restrictions (1). Due to the recent volatility in global supply chains and the issues the trade war created regarding technology, coupled with the global economic mood shifting eastward, some companies and major names have reassessed their physical and investment locations, leaping into China's open arms (2).

There is a growing divergence between China's and the US's monetary policy, with the US focused primarily on short-term crisis management, while China has adopted a more forward looking approach, aiming to avoid the risk of future financial crises resulting from overactive pandemic-induced monetary policy "Band-Aids" (3).

The talk of further appreciation of the yuan-dollar by the Biden Administration holds win-win aspects for both sides. A rising yuan strengthens its candidacy as a global reserve currency while simultaneously making China's growing imports demands less cost-heavy -both objectives which China has been pursuing, while in the US, a rising domestic inflation rate due to a falling dollar, induces higher domestic savings while attracting foreign income flows as domestic assets become cheaper—both needed to help finance Biden's $4 trillion economic stimulus and infrastructure investments goal (4).

 

References

  1. "Impossible Trinity" Shows PBOC Not In Hiking Mode

  2. Thanks To COVID-19, China Is Now The World Leader For Foreign Direct Investment

  3. On financial risk, People’s Bank of China is more credible than the US Fed

  4. Plaza Accord II: Currency a catalyst for US-China deal?