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Don’t look now, but the yuan may be about to beat expectations

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The yuan may surprise on the upside in the coming months. China’s economy undoubtedly faces challenges but so do many others. Other currencies are starting to look less appealing just as moves to attract more foreign capital into China may lead investors to greater exposure to yuan-denominated assets.

With uncertainties building in the global economy, it might seem odd to extol the virtues of the yuan. After all, such doubts might be expected to result in the investor aversion to risk that has historically resulted in less appetite for emerging markets, of which yuan-denominated assets are a major component.

But any currency trade is a comparative calculation, and that might work to the renminbi’s advantage.

On the China side of the equation, moves such as the phased inclusion – from April – of Chinese government bonds and policy bank securities in the US$54 trillion Bloomberg Barclays Global Aggregate index, should be yuan-supportive. Passively managed mutual funds and other index trackers will have more exposure to Chinese securities.

Additionally, China recently authorised a Beijing-based but wholly internationally owned unit of S&P Global Ratings to conduct credit rating business on the mainland. That should give greater peace of mind to actively managed funds that have a mandate to invest in Chinese assets.

Many big investors remain underweight........

© South China Morning Post