In the face of the US Dollar 's rise in 2021, the Chinese Yuan was a notable standout. The DXY Dollar Currency Index appreciated almost 7 percent in 2021. Meanwhile, the offshore Renminbi (CNH) gained just under 1% against the USD . However, the Yuan's strength will likely be increasingly tested in the first quarter of 2022 and throughout the year.

There have been a plethora of woes taking their toll on China's economy. These include the Evergrande crisis, strict Covid-induced lockdowns and Beijing's crackdown on the technology and education sectors. All of these have resulted in the People's Bank of China taking action to stimulate the economy. These include cutting reserve requirement ratios and curtailing the CNH's strength.

Still, the Yuan remained resilient, why? A likely cause is surging Chinese exports – see chart below. The United States is the largest export target. According to data from Statista.com, in 2020 China exported about 3.13 trillion Yuan worth of goods to the US, up by 8.4% from 2019. Keep in mind, this is despite tariffs remaining in place from the US-China trade war during the Trump administration.

It also does not hurt that Chinese debt has relatively higher yields. This helped attract foreign portfolio investment in an era of historically low bond rates, on top of high demand for Chinese goods. With that in mind, a combination of slowing US economic growth and a hawkish Federal Reserve, as the PBOC grapples with a slowing China, could place the CNH on the defensive in the coming quarters.

Chart Created in TradingView

According to data from the Fed, US real GDP is expected to increase 4% in 2022, down from 5.5% in 2021. This is then anticipated to fade to 2.2% in 2023. Moreover, as the economy continues to reopen, and other nations follow, abnormally high demand for consumer goods could shift increasingly towards the service sector. That may bode ill for Chinese export demand, denting CNH.

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