China’s currency has risen more than 7% against the US dollar since May © Financial Times

The Chinese renminbi has been a hot bet for investors taking a position on the US election. A historic rally in the currency has boosted its value against the US dollar by more than 7 per cent from May lows. A swift unwind is now on the cards.

A Joe Biden presidency was priced in. The thesis is that if elected, Mr Biden would be much less hawkish on trade relations with China, reducing tariff pressures on exports.

These have been recovering anyway, fuelling a large trade surplus that has also boosted the currency. Foreign investors have driven the rally. There has been a surge in trading volumes in the offshore renminbi market. Offshore funds have then poured into China’s equity markets, helping push their value to a record of more than $10tn this year.

With the election result hanging in the balance, renminbi bulls could find themselves as confounded as “blue wave”-backing pollsters already are. The currency spiked then slumped, according to Refinitiv data, with the publication of voting results that showed a surge in support for Donald Trump.

Worsening trade hostilities would hurt US companies as well as Chinese counterparts. The latter group would, however, receive some compensation via an unwind in the currency trade. This would boost the margins of Chinese companies such as Xiaomi and Lenovo by making their products more competitive.

A limiting factor is the Chinese central bank’s greater leeway on setting exchange rates. Last year, a weak yuan would have meant hefty capital outflows from nervous foreign investors. The pandemic has turned the tables. China’s strong economic recovery, cheap government bonds and a growing tech industry have made the currency less prone to sentiment-driven swings.

A stable outlook for Chinese equities, which should stay mostly unaffected by US election results, helps too. The outbreak of the trade war in 2018 was marked by a 30 per cent drop in the country’s benchmark CSI 300 index. China has now undergone two years of political fallout with the US. Its markets have emerged stronger.

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