This year, Korea, China, and Japan all recorded double-digit growth rates in exports from a year earlier. Typically, when export performance is strong, dollars flow into a country's foreign exchange market and the currency value rises. However, over the past six months, the yuan rose 3.2% against the U.S. dollar, while the won fell 6.3% and the yen declined 2.4%.
In China, as foreign funds flow into the capital market and the share of yuan settlements by export corporations worldwide increases, the currency value is rising. In Japan, the currency value is believed to have fallen because many investors expect a weaker yen due to the wide interest rate gap with the United States. However, as foreign funds are flowing into the stock market, the decline in currency value was smaller than in Korea, where foreigners are making large net sales.
◇ Foreigners invested 44 trillion won in the Chinese stock market in April alone… yuan settlements for export payments also increased
According to data released by governments on the 4th, Korea's exports from January to May totaled $394.461 billion, up 43.5% from a year earlier. Over the same period, China's totaled $1.71 trillion, up 15.5%, and Japan's totaled 49.7812 trillion yen, up 12.6%. Semiconductors led Korea's exports, while semiconductor manufacturing equipment and automobiles led Japan's. Home appliances and machinery drove China.
Typically, when exports increase, dollars flow in and that country's currency value rises. As of the 3rd, the yuan-dollar exchange rate was 6.78 yuan, down 3.2% over half a year. By contrast, over the same period, the won-dollar rate rose 6.3% to 1,525.6 won. The yen-dollar rate also rose 2.4% to 160.7 yen. It is analyzed that factors other than exports are influencing exchange rate movements.
The yuan's strength is the result of a combination of inflows of foreign investment funds and increased demand for settling export payments. Although the Chinese government does not disclose the scale of foreign investment, inflows appear to have accelerated this year. According to Bloomberg estimates, in April alone, 200 billion yuan (about 44.2 trillion won) in foreign investment funds flowed into China. It was the largest monthly amount since January.
An increase in cases where exporters and importers settle trade transaction payments in yuan is also cited as a factor behind the yuan's strength. According to China's Cross-Border Interbank Payment System (CIPS), yuan settlement in March was 1.4 trillion yuan (about 314 trillion won), three times the level in March 2021.
China is pushing for the internationalization of the yuan as a counter to the U.S. "dollar hegemony." In addition, yuan-denominated crude oil transactions have increased since the Middle East war. According to Bloomberg, Iran proposed the yuan, not the dollar, as a means of settling the Strait of Hormuz transit fee. After facing sanctions from Western countries over the Ukraine war, Russia is said to have established a structure to receive export payments for crude oil and natural gas in yuan.
There is also an analysis that the Chinese government is allowing some yuan strength. Meritz Securities said last month, "Yuan strength carries the policy intent of the People's Bank of China to both seek improved relations with the United States and accelerate yuan internationalization and foreign capital inflows," adding, "If export growth and the trade balance remain at similar levels, expectations for a stronger yuan will likely continue for the time being."
◇ Won weakness driven by large-scale net selling of stocks by foreigners
The prevailing view is that the weak yen stems from the interest rate gap with the United States. The U.S. benchmark interest rate is 3.50% to 3.75% annually, and although Japan raised its benchmark rate last month, it remains at 1% per year. As a result, many investors expect the yen to stay weak for the time being as investment funds move from Japan to the United States.
However, as foreign funds are flowing into Japan's stock market, the yen's decline was smaller than the won's. According to Japan Exchange Group (JPX), foreigners posted a net purchase of 10.9391 trillion yen (about 104 trillion won) in Japanese stocks in the first half of this year.
The won has weakened sharply as foreigners continue large net sales of stocks, depressing the currency value. According to the International Finance Center, foreigners' net sales of domestic stocks in the first half totaled 175 trillion won ($112.5 billion), the largest on record. That is enough to offset 81% of the first-half trade surplus. With stock prices having risen significantly, and with the won currently low and potentially falling further, investors appear to be taking profits.