Chinese currency increasingly becoming preferred legal tender

The not-so-overt appreciation in the renminbi — or yuan, as the Chinese currency is more popularly known — is making it an increasingly preferred legal tender in the emerging markets.

On Monday, the People’s Bank of China pegged it 0.03% higher — the fourth consecutive day it has done so — to a record 6.3950 per dollar.

That’s the highest level since 2007, and comes after China reported a mind-boggling trade surplus of $31.5 billion in July, the biggest since January 2009, last week.

"Fundamentals really support the yuan to be stronger," Leong Sook Mei, a currency strategist in Singapore at Bank of Tokyo-Mitsubishi UFJ Ltd, told Bloomberg. "The data for the trade surplus as well as inflation were very elevated."

The day also saw Asian currencies advance, led by Malaysia’s ringgit, as better-than-forecast US and Japanese economic data reduced concern the global recovery is faltering, bolstering demand for emerging-market assets.

But no currency in the emerging markets is a true safe haven yet, experts said.

“Safe havens need high liquidity and some emerging market currencies simply don’t have the trading volumes to be considered as a destination during flight to safety. That status still remains only with Swiss franc, Japanese yen and gold,” said Clyde Wardle, senior emerging markets forex strategist with HSBC Securities in the US.

Selling pressures have been substantial and, while there have been pockets of interest to buy emerging market currencies, Wardle said in a note last week.

Experts believe China will allow the yuan to appreciate to offset inflationary pressures, making it attractive to traders.

Heightened global risk aversion following the downgrade of the US by Standard & Poor’s has seen most emerging market currencies sliced compared with the dollar. For example, the Mexican peso and the South African rand have both lost 6% in a short time.

Not so the yuan, which has held out well, even rising against the greenback.

“We expect the yuan to rise 6-7% in the next one year. China will not artificially weaken the currency further to make imports cheaper,” says Abhishek Goenka, chief executive officer, India Forex Advisors.

The rupee, on the other hand, is expected to underperform due to obligations such as payment for oil purchases from Iran.

“My rupee view is that we will be more at a depreciation bias than an appreciation bias. We are around `45.30 or so now. And 46.50 is where it can go (in the next week),” said Mohan Shenoi, group head of treasury, Kotak Mahindra Bank.

He believes it’s not safe to place faith in a single currency and consider it safe. “There may be safe currencies but there may not be bankable projects in that country, or there may not be opportunities in the stock market. Currently, if you look at the trend, there is not much of risk aversion in sight. Otherwise, oil prices should have gone below $100 and stayed there.”