Yuan strength is symptom of Omicron

CHINA'S currency has strengthened since the news broke about the Covid-19 Omicron variant. This is not a coincidence. A more transmissible variant would reinforce many of the yuan's key supports, just as the original strain did when it went global.

Shutdowns in other producing economies - and a shift in demand from services to goods in major markets - have seen China's merchandise trade surpluses swell to obscene levels, recovering swiftly from a dip during the early pandemic to hit a record US$84.5 billion in October 2021. Restrictions on international travel have severely curtailed a major component of Chinese capital outflows, bringing the deficit in services trade to less than half its pre-pandemic level.

The combined effect of the boost to the trade surplus, and the crippling of international tourism, has been a significant improvement in China's current account balance, to 1.8 per cent of gross domestic product (GDP) in Q3, from an average of 0.7 per cent in 2019, essentially rolling the clock back to 2017, if not earlier. This growing surplus provides a structural support for China's currency.