Pro Perspectives 11/28/23





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November 28, 2023

A year ago this month, China's President Xi opened China's International Import Expo with an opening ceremony address titled: "Working Together for a Bright Future of Openness and Prosperity."
He said, China remains committed to "opening up to the outside world." 
The speech was full of language suggesting China wanted to play nice in the world for "mutual benefit," working with "all countries" to share opportunities from "deepened cooperation."
As a signal, Xi (the PBOC) strengthened the yuan that day (which they control) from fifteen-year lows.  A stronger yuan is counter to their economic interest (and policy), where they like to manipulate a weak currency to drive exports.  So, a stronger yuan was intended to signal alignment with Xi's speech (of cooperation/global friendliness).
As you can see in the chart, the strengthening of the yuan continued over the next three months, to the tune of about 10% …
As you can also see in the chart (to the far right), China strengthened the yuan to coincide with Xi's speech at the recent APEC meetings in San Francisco.  
What did he say?
In the face of tense U.S./China relations, the speech was full of conciliatory and idealistic language.  He said China is "ready to be a partner and friend of the United States."  He called for a peaceful coexistence, cooperation and "mutual respect."  And he promised to "never pursue hegemony or expansion."
So, perhaps as a sign of good faith, Xi and the PBOC are strengthening the yuan again (again off of fifteen-year lows). 
Also keep in mind (a little backstory), for the decade prior to the Trump presidency, China agreed to slowly allow the yuan to appreciate (against the dollar) in response to tariff threats from Senators Graham and Schumer (yes, Schumer). 
They let the yuan climb by an average annual rate of just 6%.  That kept the toothless U.S. tariff threats at bay.  Meanwhile, using the continued weak currency advantage to fuel exports, the Chinese economy grew by four-fold during over that ten-year period.  Enter Trump, and he went forward with tariffs on Chinese goods, penalizing China for unfair trade. 
So, while in San Francisco, did Xi and the Biden administration make a deal that includes a stronger yuan and relaxed tariffs? Maybe.
For markets, what performed over that stretch in late 2022/early 2023, of a stronger yuan and weaker dollar (from the chart above)?  Chinese stocks (up 12%), Emerging market stocks (up 27%), Copper (up 23%), and gold (up 21%).