A paradox of protectionism
Yet during the past few years there has been a steady ramping up of pressure on China, particularly related to US-China trade, to say nothing of the more recent tensions generated by the Covid-19 pandemic.
These factors, perhaps somewhat paradoxically, are likely to push China to open up its currency even more, according to Patrick Tekely, Vice President, Asia Pacific FX Product Management at BNY Mellon Markets. Investors have been calling on Chinese regulators to introduce hedging tools as they scale their portfolios in China and seek to manage more complex risks – and the regulators are heeding those calls amid an overall push for integration of Chinese capital markets with the rest of the world.
The RMB’s use is likely to remain restricted during the next couple of years, but the People’s Bank of China (PBOC) is undertaking reforms in this respect. Patrick views that the central bank will continue to promote investment class flows, but immediate attention to easing capital repatriation and the ability to efficiently trade with multiple FX counterparties would prove beneficial. Greater clarity on hedging rules and the legal agreements required between investors and forex counterparties would likewise be welcome.
Going forward, there are both micro and macroeconomic factors to consider, particularly issues involving the US-China trade relations.
“Given the fact that 2020 is a presidential election year in the US, the hawkish tone adopted by the US towards China is likely to continue, which may have consequences for China’s economy,” said Michael Huang, Head of FX Sales China at BNY Mellon.
Other developments will involve the pace of China’s economic rebound, and the dynamics of global export flows in markets in which China is a player.
Global investors should lean on their service providers for advice and expertise in navigating the RMB market, while also staying up to speed on new market reforms and developments in various access schemes. As the RMB will inevitably continue to open up, ultimately global investors should continue to build their capabilities in accessing the world’s second largest capital market.