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Xinhua Silk Road
Economy

Global capital flows changing direction as foreign investors luff the helm to buy yuan

March 15, 2019


Abstract : Since the end of 2018, a large number of overseas institutional investors have kept a bullish sentiment for Chinese yuan exchange rate, rather than continuing to sell Chinese yuan in offshore market.

BEIJING, March 15 (Xinhua)-- Since the end of 2018, a large number of overseas institutional investors have kept a bullish sentiment for Chinese yuan exchange rate, rather than continuing to sell Chinese yuan in offshore market.

On March 5, the onshore yuan dipped by nearly one hundred points against the U.S. dollar at the opening, and inched up towards the 6.70 threshold while the offshore yuan exchange rate fluctuated around 6.70. As of 9:44 on the morning, the onshore and offshore yuan were traded at 6.7039 and 6.7067 respectively, the highest since July 17 last year.

"From the perspective of forward curve and risk reversal, the rising Chinese yuan exchange rate is mainly driven by market forces," noted a foreign exchange trader.

--- Chinese yuan exchange rate continues to rise

Recently, Jerome Hayden Powell, chair of the U.S. Federal Reserve, reiterated that the central bank would stay patient on monetary policy which further cracked down on U.S. Dollar index. This action has helped buoy Chinese yuan exchange rate up indirectly. Dollar bulls are running out of steam, as reflected in the trend of U.S. dollar index, reckoned a market insider.

Encouraged by the optimistic sentiment, market players are increasingly willing to conduct foreign exchange settlement, with their motivation for purchasing foreign currency waned.

Domestically, China witnessed its imports in January rose by 9.1 percent while exports dip by 1.5 percent respectively. Trade surplus amounted to 39.1 billion U.S. dollars, a 112.6 percent increase year on year, far better than expected. The international balance of payments remains in a sound position, laying a solid foundation for stable exchange rates, in the view of Guan Tao, a former official of State Administration of Foreign Exchange.

--- Foreign investors flock to buy Chinese yuan

Overseas financial institutions have no longer, in fact, rushed to sell Chinese yuan since the end of 2018.

"Majority of overseas institutional investors believe that Chinese yuan appreciation promise a high probability in 2019 and thus, see no reason to proceed with selling," a manager at an overseas hedge fund said.

"This year has seen capitals pouring into global emerging markets, which indicates that short-selling of Chinese yuan will bring risk," reckoned Li Liuyang, senior foreign exchange analyst at China Merchants Bank in Shanghai. Against the improving global financial conditions, the one who choose to sell Chinese yuan will go against the trend of global capital flow, Liu added.

"Currently, both Chinese yuan's one-year forward price and spot price are basically equal. The margin of profit from short-selling has become extremely narrow," said the head of trading at a overseas financial institution. Short sellers in offshore market have been few in number at the moment, he added.

Accordingly, offshore financial institutions have already shifted their gear to buy Chinese yuan.

"Previously, we have adjusted our expectation of a 2-percent fall in the Chinese yuan exchange rate, and now we are hedging our selling transactions of last year by buying yuan positions," the head of an offshore hedge fund said, adding that the Chinese yuan exchange rate is expected to fluctuate above 6.7 in the short term.

Meanwhile, the enthusiasm for offshore funds allocating RMB assets has also indirectly supported the rebound in the onshore Chinese yuan exchange rate. Data released by the China Central Depository & Clearing Co., Ltd. (CCDC) and the Shanghai Clearing House showed that foreign institutions have made net purchase of about 25.01 billion yuan of Chinese bonds in January. As the Chinese yuan bonds are going to be included in the Bloomberg Barclays Global Aggregate Index in April, the investment demand of offshore institutions forced to track the index will be on progressive rise.

However, since most of the optimistic market expectations are reflected in the Chinese yuan exchange rate, the risk that the gains might be exhausted still requires vigilance.

“The pace of yuan appreciation may slow down. Given that the appreciation still lacks fundamental support, monetary policy by the People's Bank of China may continue to maintain marginal easing. Both will put some pressure on the exchange rate correction,” said an insider, but adding that the probability of a significant weakening of the Chinese yuan exchange rate has been greatly reduced as external risks are less urgent. (Edited by Bao Nuomin, baonuomin@xinhua.org; Yang Yifan, yangyifan@xinhua.org)

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Keyword: exchange-rate foreign-capital-inflow

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