The Chinese currency demonstrates the biggest impact to date on emerging country currencies and could play a crucial role in their performance next year.
The correlation between the renminbi and an MSCI index that tracks developing-nation currencies hit a record in September, before a slight retreat on the advance of the variant omicron, according to data from Bloomberg.
Although the close relationship is partially attributed to the great weight of the China, the movement is also driven by the fact that the yuan has reached its strongest correlation with the Brazilian currency since at least 2008. In the case of the Indian rupee, the ratio reached the highest level in three years.
The yuan’s growing global influence is yet another sign of China’s deepening connections with the world economy.
Investors are increasingly interested in Chinese bonds as an alternative to US Treasuries, while some banks argue for the renminbi to join the dollar, euro and yen as a global reserve currency.
However, China’s potential is overshadowed by murky government policies and regulatory repression. Thus, too close a link to the renminbi can bring risks.
“China will be a very important element for the stability of emerging countries and for the growth outlook,” said Magdalena Polan, principal economist at PGIM in London.
“The willingness of Chinese authorities to stabilize growth will be very important for the prospects of Latin America, Asia and South Africa, which still depend heavily on China’s exports.”
The correlation between the yuan and its peers on the MSCI Emerging-Markets Currency Index rose to 0.81 in September on a weekly basis from 0.24 at the end of 2010, according to data compiled by Bloomberg. The correlation was at 0.72 on Thursday. Result 1 would mean that assets move in full sync.
While correlations can be measured in a variety of ways, China’s growing presence in global trade has strengthened ties between the yuan and its peers in emerging markets.
In 2000, the average developing nation sent just 2.2% of its exports to China, whereas today that share is at 11.3%, according to data from Société Générale.
For the investment bank, the relative stability of the yuan makes it more closely correlated with currencies from emerging countries where rulers have more strength and credibility, such as Mexico, Chile and South Korea.
However, since the 2018 US-China trade war, the renminbi’s ties to emerging markets as a whole have become firmer, with the average correlation advancing to 83% that year, according to SocGen data.
Source From: Moneytimes
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