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Chinese Yuan Strengthens As PBoC Signals Policy Tightening in 2021

January 12, 2021 at 15:43 by Andrew Moran

Yuan note reverseThe Chinese yuan is adding to its strong start to 2021 against the US dollar on Tuesday. The yuan, which has been one of the top-performing currencies in foreign exchange markets over the last eight months, is finding support on policy support stabilization, highlighting that officials are confident that the recovery is occurring at a good pace. Although policymakers have indicated they will allow the yuan to appreciate, investors are wondering how much longer they will let the currency surge.

According to the People’s Bank of China (PBoC), the broad M2 money supply grew 10.1% year-over-year in December, down from 10.7% in November. It was also lower than the market forecast of 10.7%.

Outstanding credit growth stalled at an annualized rate of 12.8% last month, while the stock of outstanding yuan loans surged to 171.6 trillion yuan.

Net financing of corporate bonds slowed to the lowest level since September 2018. Government bond issuance grew from November to December. Shadow banking plunged to its lowest level in more than four years. Medium- and long-term lending to households and non-financial companies advanced one trillion yuan.

Speaking in an interview with state-run Xinhua News Agency, PBoC Governor Yi Gang revealed that monetary policy would be stable this year. Yi explained that liquidity should be reasonable and ample, adding that the M2 money supply and aggregate social financing will likely match the growth in the gross domestic product (GDP). He further noted that there could be tightening in credit supply, although market observers note that credit growth might have already peaked in November.

In 2021, monetary policy should prioritise stability to maintain … sustainability.

Overall, according to the Chinese central bank, the state of monetary policy could be more flexible and targeted that concentrates on supporting smaller firms.

In other data, the National Bureau of Statistics (NBS) reported on Monday that the inflation rate climbed 0.7% in December. The producer price index (PPI) slipped 0.4% year-over-year last month.

The International Monetary Fund (IMF) released its revised outlook of the Chinese economy, forecasting that the GDP would grow by 7.9% this year, down from the 8.2% projection in October. The IMF cited US tech decoupling, skyrocketing national debt, and lower dollar funding in Hong Kong.

The pandemic has weakened aggregate private consumption as income dropped, especially for the more vulnerable households, while the better-to-do increased precautionary savings. At the same time, public investment increased significantly, threatening to reverse the progress towards more balanced growth achieved over the last five years.

The USD/CNY currency pair fell 0.26% to 6.4640, from an opening of 6.4808, at 14:33 GMT on Tuesday. The EUR/CNY dropped 0.24% to 7.8562, from an opening of 7.8758.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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