Fixed Income: Safe Haven Renminbi

"We reiterate our view for long-term appreciation of the undervalued currency.  The EPIC Renminbi Bond Fund has benefitted from the currency’s long-term appreciation and carry against the dollar, which currently stands at ~3%."

Amid geopolitical tensions and hawkish Fed rate hike projections there has been increased market chatter over whether the renminbi is being treated as a safe haven currency, following its resilience and recent appreciation against major trading partners. The onshore unit has steadily appreciated against the dollar, breaking through the 6.32 level to a ~4 year high this month. Despite backing off the 6.311 lows, set in the early hours, the onshore renminbi has returned 0.67% against the dollar so far this year. The offshore currency is up 0.91%, at time of writing. 

The renminbi’s strength has also been supported by the steady flow of foreign capital into China. Data from the Ministry of Commerce shows FDI into China increasing a further 11.6%yoy in January; FDI into China has increased every month since March 2020. Moreover, international funds have been rapidly piling into Chinese Government Bonds over the past few years, and further economic integration with other Asian nations has led to increased renminbi denominated transactions.

SWIFT recorded renminbi payments jumping to a record 3.2% of global market share in January, up from 2.7% in December. The currency therefore maintained its fourth-place position globally, after the US dollar, euro and sterling, and ahead of the Japanese yen. The currency’s popularity was supported by increasing willingness by foreigners to hold the currency, and China has gained more power in the global supply chain through the pandemic disruptions and will likely bounce back through pre-pandemic levels quicker than other industrial economies. 

As China continues to widen its trading lines and relationships we heard of a tighter alliance with France. During a virtual meeting between Jinping and Macon last week the two nations agreed to the Fourth Round China-France Third-Party Market Cooperation Pilot Project List. In a first of its kind, France has established a third-party market intergovernmental cooperation mechanism, where the nation will team up with China to build seven infrastructure projects worth over USD1.7bn, in Africa, Southeast Asia and Eastern Europe. The nations also discussed six bilateral agreements including finance cooperation on the RMB Cross-border Interbank Payment System; necessary for bilateral trade, which exceeded USD 80bn last year. France’s agreement to use RMB cross-border settlement will undoubtedly lead to the nation adding the redback to its reserve currency list; further supporting the internationalisation of the renminbi, a top priority for Chinese officials.

Whether or not the renminbi is a safe haven currency, growing popularity in the redback globally should in turn provide additional support for RMB denominated assets, and there are some newswires hinting at the possibility of the IMF assigning a larger share of the SDR basket to the renminbi in July. The renminbi’s strength bodes well with China’s “dual circulation” strategy by cheapening imports, in-turn, bolstering consumer demand/spending, thus domestic growth. Moreover, China’s surging trade surplus will also underpin the renminbi’s long-term appreciation. 

The EPIC Renminbi Bond Fund, which has been running since 2007, invests in highly rated, hard currency, Pan-Asian bonds (and USTs) and has a 100% overlay of the Chinese renminbi. The fund has benefitted from the currency’s long-term appreciation and carry against the dollar, which currently stands at ~3%. We reiterate our view for long-term appreciation of the undervalued currency. 

Freddie Coldham
Fund Manager, Fixed Income