Over the past two years, the Chinese currency has been hit by volatile geopolitics, while traditional valuation measures such as the current account surplus and interest rate differentials have retreated.
At a time when Trump's exit from the White House is imminent, and with China's economy growing once again, the yuan's outlook is optimistic, and the central bank is preparing for a less volatile world.
In a report published by Bloomberg, author Shuli Ren said that two strange things happened at the People's Bank of China in less than a month.
First: It is no longer necessary for banks to seize any cash when clients make selling of the yuan, which makes betting on the currency a cheaper procedure, which contributes to weakening the yuan.
Second: The People's Bank of China removed the so-called countercyclical factor, which is one of the elements used to determine the daily exchange rate of currencies, and these important tools were created in 2015 and 2017 to stop the yuan's decline.
The author added that the last quarter was the best for the yuan in more than a decade, at the moment Beijing needs to prevent the currency from becoming too strong, especially with the high chances of Joe Biden winning.
Regardless of the position the Democratic candidate takes toward China, his policies will surely be more predictable than those of President Donald Trump, which will be in the interest of the yuan.
Curbing excessive currency volatility will be critical if Beijing is to maintain a steady flow of foreign funds, and overseas investors - lured by the proceeds - are buying Chinese sovereign issuances at a record pace.
According to a Bloomberg report, if the yuan becomes a plaything for speculative traders, long-term investors will have to worry about hedging the currency, especially when the market believes that the Democrats ’victory will lead to higher Treasury yields. In addition, the interest rate differential between China and the states may narrow. United, which currently stands at 2.4%.
China is happy with the fact that Biden's victory would remove some of the damage Trump has done to its currency (Al Jazeera)
The temptation of the yuan
Beijing needs an influx of foreign portfolios at present, and the government is on the way to issuing 3.8 trillion yuan ($ 568 billion) of bonds this year, an increase of nearly 130% compared to 2019.
Meanwhile, commercial banks bought only 56% of net sovereign bonds, compared to 65% in 2019.
Beginning last June, the central bank limited liquidity among banks to discourage asset managers from taking advantage of cheap loans and investing in risky financial products. Currently, banks are suffering from a shortage of money, and for this reason foreign investors have become the solution to bridge the financial gap this year. .
One legitimate concern is whether the People's Bank of China abandoned major instruments too soon, but even without the counter-cyclical factor the yuan's peg will still be based on the previous close.
Looking at emerging markets, one cannot emphasize enough how important a stable currency is to foreign investors.
And the Bloomberg report says China is happy with the fact that Biden's victory would undo some of the damage Trump has inflicted on its currency, and in return, Beijing does not want the yuan to march fast.