China’s RMB To Appreciate?

The threat of inflation — coupled with a fragile economy — tends to be bad news for stocks because of how it erodes corporate profits, and for bonds it reduces the value of future cash flows. Accelerating prices walloped China’s bond market in 2019, and contributed to a steep selloff in stocks in early 2016.

As the global economic recovery accelerates, some are being forced to act because of inflation: Brazil in March became the first Group of 20 nation to lift borrowing costs, with Turkey and Russia following suit. Even Iceland hiked a short-term rate in May.

The 10-year government bond yield has fallen to the lowest level in eight months, while the stock benchmark CSI 300 Index is the least volatile since January. The calm contrasts with the rest of the world, where investors are becoming increasingly obsessed with how central banks may react to the threat of an overheating global economy.

How to mitigate the boom in property and commodities without tightening macro policy — it’s a real challenge for the Chinese government.

Zhou Hao, an economist at Commerzbank AG in Singapore.

In a sign of how seriously that threat is being taken, China’s cabinet said Wednesday more effort needs to be taken to tackle rising commodity prices. A PBOC official said China should allow the yuan (RMB) to appreciate to offset the impact of rising import prices, according to an article published Friday (2021-05-21). The currency is trading near an almost three-year high against the dollar.

Reference

Bloomberg, 2021-05-23, “Bubble Risks Test China’s Commitment to No Sharp Turn in Policy”