Yuan's Global Usage Plummets Amid September FX Strength

The Chinese yuan's global usage experienced a significant decline in September 2024, coinciding with a strengthening of the currency against the US dollar. This trend can be attributed to a combination of factors, including China's economic policies, geopolitical tensions, and interest rate differentials.

China's stimulus measures and monetary policy adjustments played a crucial role in the yuan's decline in global usage. In September, the People's Bank of China (PBOC) announced a series of easing policies, including a 50 basis point cut in the reserve requirement ratio (RRR) and a 20 basis point reduction in the 7-day reverse repo rate. These measures aimed to boost liquidity and support economic growth, but they also led to a widening yield gap between China and the United States. As a result, the yuan appreciated, making it less attractive for international use.

Geopolitical factors, such as US-China trade tensions and the US elections, also influenced the yuan's global usage in September. The yuan's strength against the dollar, driven by China's stimulus package, may have deterred foreign investors, as a widening yield gap and uncertainty over US elections supported the USD.

Interest rate differentials between China and other major economies also played a significant role in the yuan's global usage. As of September 2024, China's 10-year bond yields were around 2.067% and 30-year yields at 2.173% (CNBC, 2024). In contrast, the US 10-year Treasury yield was 3.5% (Bloomberg, 2024), indicating a significant yield gap. This gap can influence capital flows, with investors potentially shifting funds to higher-yielding assets in other countries, which could impact the yuan's global usage.

The yuan's exchange rate volatility can also affect businesses and investors' willingness to adopt it for international transactions. A more volatile currency makes it harder for companies to manage their foreign exchange risks and plan their financial strategies. When the yuan strengthens, as it did in September 2024, it can make Chinese exports more expensive, potentially reducing demand and negatively impacting businesses. Conversely, a weaker yuan can boost exports but may lead to capital outflows, putting pressure on the currency and the economy. To mitigate these risks, businesses and investors may prefer to use more stable currencies, such as the U.S. dollar, for international transactions.

In conclusion, the yuan's global usage has plummeted in September, with the offshore yuan (CNH) strengthening briefly to 6.9946 per dollar, its strongest level since May 2023. This surge in the yuan's value can be attributed to China's recent stimulus measures, which have boosted market sentiment and increased demand for Chinese assets. However, the yuan's outlook in the coming months remains uncertain, with several factors at play. Chinese policymakers may need to intervene to prevent the yuan from appreciating too rapidly, which could maintain the yuan's global usage at current levels. The yuan's outlook is also influenced by US-China trade dynamics and geopolitical tensions, as well as relative interest rates and yields between China and other major economies. Investors should closely monitor these factors to make informed decisions about the yuan's global usage.