By ForexNewsNow
2020 has been a terrible year for the world economy. The devastating impact that the coronavirus pandemic brought to different countries is something no one expected. Covid-19 shows no signs of slowing down and every day we see record cases.
China, where the virus first appeared in Wuhan has dealt effectively with it. While European countries have become the center of the outbreak, China is already recovering from the losses.
We can see that China’s economy is reviving. The yuan has reached its highest level in more than two years. There are no signs of a halt in growth, which indicates China’s dominant role in the global economy. National exports continued to rise even as the yuan strengthened.
According to Alexandra Stevenson of The New York Times, China’s economy has overcome the coronavirus pandemic. As production revived, so did the national currency. The Chinese yuan has risen sharply against the US dollar and other currencies in recent months. On Monday (January 11) the US dollar was worth 6.47 yuan. In two and a half years it was one of the highest rates.
When we talk about currencies, it is something that concerns a lot of people involved in Forex trading and brokers alongside them. Brokers often make predictions and statements about the currency’s role in the economy and trading. According to Axiory, which is one of the leading brokers, the strong currency also strengthens the country’s economy. A strong yuan may lead to a rise in the price of Chinese exports, but so far this effect seems insignificant. The growth of the national currency of China will, first of all, feel the White House, where U.S. President-elect Joseph Biden is going to move next week. In previous U.S. administrations, the yuan’s weakening has generally been irritating. Strengthening the currency of China, if it does not ease the tension between the countries, will help to remove one potential problem from the agenda of President Biden.
Currency and its strength is especially important for Forex traders. If we take a look at the currency strength meter MT4, one of the most popular trading tools used today, the indicator’s job is to let the trader know which currency is performing well at a given time and which one is not. And Chinese yuan is one of the most traded currencies in the world.
Why is the yuan rate strengthening?
China has managed to suppress the coronavirus pandemic within its borders, at least for now. Factories are operating at full capacity. Customers around the world, many of whom are stuck at home, buy Chinese computers, televisions, selfie ring lights, swivel chairs, garden tools and other household appliances on the Internet. According to Jefferies Co., China’s share of world exports rose to a record of 14.3% in September 2020.
Investors are also keen to keep their money in China, or at least invest it in yuan. When the Chinese economy strengthens, China’s central bank is able to set interest rates higher than in Europe and the United States. There, central banks maintain the lowest ever rates to support economic growth.
Against the background of the weakened U.S. currency, the yuan now looks particularly strong. Investors are betting on the recovery of the world economy in 2021. Many of them are beginning to transfer their money from U.S. Treasury bonds to riskier financial instruments. All this led to an increase in cash flows to China, and this in turn contributed to the strengthening of the national currency.
How does Beijing work?
The Chinese authorities have not yet taken anything special. The Chinese government has for years kept the yuan’s exchange rate against the dollar weak, even as the Chinese currency was expected to strengthen. The weak yuan helped Chinese factories keep prices low when selling goods abroad. It seems that now manufacturers do not need such help. China’s exports continued to rise even as the yuan strengthened.
Shawn Roache, who is chief Asia Pacific economist at the Asia-Pacific agency, noted that many people rate their business in dollars, not yuan because the United States makes up a significant share of their customer base. This means that while the profitability of the Chinese factory may decline, American buyers will not notice much difference in prices and will continue to buy.
A strong yuan could help China make the national currency more attractive to companies and investors who want to do business in dollars. China has long sought to give its currency more weight in the global monetary system to increase international influence, but the Chinese authorities’ desire to strictly control the use of the yuan often overshadows those ambitions.
Becky Liu, who is head of China’s macroeconomic strategy at Standard Chartered Bank, also said that this was definitely an opportunity for China to move the yuan to the international level.
However, if the national currency strengthens too quickly, Chinese leaders can step in and put an end to this trend.
China is destined to become the world’s leading economy. Many experts believe it is only a matter of time before it surpasses the United States and takes the lead.
By ForexNewsNow
