China is unlikely to use its currency aggressively as a tool against the United States, even if tensions continue to rise between the two economic giants, chief economist at Morgan Stanley told CNBC.
“I think another trend is emerging … China does not want its currency to be so volatile, or to be seen as a currency that is not considered stable enough to be a long-term place to be a reserve currency,” Morgan Stanley’s Chetan Ahya told CNBC on Thursday. The US dollar is currently the world’s reserve currency, but Beijing has been pushing for greater international use of the Chinese yuan.
Previously, a weaker yuan has been a key source of dispute between the US and China, with US President Donald Trump accusing Beijing of intentionally letting its currency fall. A weaker yuan makes Chinese exports more attractive, giving them a competitive advantage in international markets, some experts argue.
Last year, the Trump administration called China a currency manipulator after Beijing allowed the yuan to weaken to 7 against the dollar, a closely watched psychological level, for the first time in 11 years.
The yuan onshore was last trading at 6.9868 against the dollar on Thursday morning, and the yuan onshore was at 6.9872, both strengthening from weaker levels of around 7.17 in May.
Beijing will not use its currency ‘aggressively’
Relations between the US and China have worsened in recent months due to the coronavirus pandemic and the imposition of a national security law on Hong Kong by Beijing. United States President Donald Trump said Tuesday that he signed an executive order ending the preferential treatment Hong Kong has been receiving. China has promised to retaliate against that movement.
On Wednesday, US Secretary of State Mike Pompeo said Washington will impose visa restrictions on Chinese tech companies.
Ahya added: “We believe China will not use its currency aggressively, even if new rounds of trade tensions emerge. We believe they will be more focused, in the context of geopolitical developments, on trying to maintain it.” more stable so it can be seen as a stored value currency where people are attracted to entering Chinese assets. “
China has made some progress in internationalizing the use of the yuan as Chinese assets are increasingly traded on world markets, causing more foreigners to need to trade the yuan.
Chinese A-shares, those traded in mainland China, have been included in MSCI’s global and regional indices. A-shares, as well as Chinese bonds on the Bloomberg Barclays index, are traded in yuan.
In fact, Goldman Sachs predicted that the yuan will strengthen to 6.70 per dollar in the next 12 months, as its home economy experiences a strong rebound in the coronavirus shock.
In a report last week, the investment bank wrote that investors can look beyond the short-term “noise” surrounding the strained relationship between the two countries.
“First, financial markets may increasingly look through a rebound in short-term noise around the bilateral relationship, because survey data points to higher odds of rotation at the White House next year, which it could affect the objectives and tactics of the United States’ foreign policy, “he wrote. .
Second, China’s internal fundamentals are looking stronger: growth remains strong, the virus is reported to be under control, the trade surplus has expanded, and both equity markets and interest rates they are going up, “added the Goldman report.
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