The Yuan and the Truth About Emerging-Market Currencies


An interesting dynamic, which played out recently, is the reversal in fortunes of the Chinese yuan, but we don’t think you should read too much into it. China’s yuan is a managed currency—but that doesn’t mean its direction is easy to predict. Trends for this emerging market currency have been whipsawed recently as the Chinese government switched its currency tactics.

Recap of yuan dynamics.

Starting last year, China wanted to depreciate the yuan in a calm manner, as it was pegged at an artificially high rate versus the U.S. dollar. This was part of a broader move by Chinese central authorities to justify the yuan being added to the International Monetary Fund (IMF) basket of reserve currencies. By allowing global markets to have a larger say in the value of the yuan, Chinese authorities hoped to demonstrate their growing embrace of market mechanisms. So, they allowed the yuan to have its value partially determined by global currency markets rather than only through a government-determined peg.

Sadly, for Chinese authorities, the global currency markets kept trying to take the currency to the “wrong” price, causing the yuan to suffer a steep decline. This caused vexation on the part of the Chinese government and they decided to return to the old way (you know, where they manipulated the yuan to the value they thought it should be), causing a rapid appreciation of the yuan versus most major currencies.

A look at the following chart shows how their experiment played out, and illustrates some of the unfortunate consequences:

WSJ Graph

Can you find when the Chinese government allowed markets to determine yuan levels? And when they changed their mind? Both are, unsurprisingly, tied to the chart’s peaks and troughs (not necessarily in that order). Finally, it looks like the strengthening currency had an immediate braking effect on China’s exports. Not sure this quite played out according to plan.

The bottom line

Don’t believe everything you read (or see) related to the yuan. There are a lot of factors, many unseen, in motion and they often deliver conflicting results. A strengthening yuan is not always good news for the Chinese economy, and a rapid appreciation in the yuan is not always indicative of a positive viewpoint by the capital markets.

Potential Parametric solution

Our Emerging Markets Strategy includes large-, mid-, and small-cap stocks in over 50 developing countries. The strategy invests across both emerging and frontier markets using a top-down, three-part process designed to eliminate country and sector concentrations. We apply a disciplined, unemotional trading approach to build and maintain the strategy’s investment exposures.

Tim Atwill

Tim Atwill, PhD, CFA, Head of Investment Strategy (emeritus)

Tim led the Investment Strategy Team at Parametric, which is responsible for all aspects of Parametric’s investment strategies, until his retirement in 2019. He also held investment responsibilities for Parametric’s Emerging Markets and International Equity strategies as well as shared responsibility for the firm’s Commodities Strategy.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.