Dollar Wanes as Yuan Assets Soar, $20B Inflows

The United States, under the pretext of inflation, has been continuously raising interest rates, leading to a constant increase in the US dollar index and a strong appreciation of the US dollar. In this process, the currencies of other countries have depreciated significantly. This is a common tactic of the United States, using the repeated appreciation and depreciation of the US dollar to cause significant fluctuations in the asset prices of other countries, thereby achieving the goal of harvesting global wealth.

This time, the Chinese yuan has also been greatly affected. Starting from late April, the exchange rate of the yuan has depreciated significantly, and the US dollar against offshore yuan even broke through 6.83. However, in the past few days, the further appreciation of the US dollar has been frustrated, and the yuan has rebounded strongly, starting a major counterattack in conjunction with the increase in its weight in the SDR.

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For a long time before, although there was a slight fluctuation in the exchange rate between the US dollar and the yuan, the overall situation was relatively stable. Although the US dollar index was rising, the exchange rate of the yuan did not depreciate significantly. However, starting from late April, the offshore exchange rate of the US dollar against the yuan depreciated from 6.37 to 6.837 a few days ago, and the exchange rate of the yuan depreciated significantly in a short period. Moreover, the depreciation during this period was much greater than the increase in the US dollar index and faster than the depreciation rate of most other currencies.

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In this process, the central bank once reduced the foreign exchange deposit reserve ratio from 9% to 8%, causing the depreciation process to pause halfway, but the depreciation accelerated again a few days later. Finally, in the past few days, the speed of depreciation has been curbed, and the exchange rate of the yuan has risen for three consecutive days. In the offshore market, the exchange rate of the US dollar against the yuan has returned to 6.74.02

In fact, the depreciation of the RMB exchange rate is only a phase and short-term phenomenon. In the long run, the attractiveness of the RMB is increasing.

By the end of March this year, the proportion of the RMB in global reserves was still growing, and there is potential for further growth in the future. Currently, it accounts for 2.79%. Moreover, our country's bonds are also being invested in by foreign central banks, and the investment scale is not small.

Many factors still determine that the RMB exchange rate can remain stable.

There are multiple reasons for this. First, there is a stable return on investment. China's inflation level is lower than that of the United States, so China's real interest rates are also higher than those of the United States. The stability of the RMB value also makes Chinese bonds relatively stable.

Second, it is conducive to diversified investment. The RMB is a unique and significant asset class, which mainly relies on our country's strong macro autonomy. The RMB Treasury bond index is not correlated with the U.S. Treasury bond index, which plays a good role in diversifying investments.

In addition to the above two reasons, there are several other factors: China's bond index brings a certain stability to the funds tracking the index configuration, our country's foreign capital share is low but has a great room for improvement, our opening-up policy has brought great convenience to the bond market, and ensured the legality of cross-border funds.

Under the joint influence of various factors, it is believed that more foreign capital will buy RMB assets in the future.

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Recently, there is another good news for the RMB, that is, the weight of the RMB in the SDR has been further increased.The enhancement of the Renminbi's weight also reflects the internationalization of the currency and signifies the influence of China's economy on the global economic landscape, as well as international appreciation and recognition of China's market-oriented reforms of the Renminbi. This is also indicative of the increased market share of China's exports and the rise in foreign exchange transactions.

To observe the significance of various currencies in the world trade and financial system, the SDR basket undergoes a review every five years, which includes the quantity, composition of the SDR basket, and the proportionate weight of each currency to determine the SDR's interest rate instruments and market exchange rates.

After a long period of effort, the Renminbi was successfully included in the basket in 2015, ranking third in weight. It was the first newly added currency to the SDR basket, with the effective date set for October 1, 2016.

Recently, in the A-share market, the northbound capital has shown a net inflow. In the last five trading days, there have been four days of net inflow, with three of those days seeing inflows exceeding 5 billion. Yesterday's net inflow even approached 10 billion, and just these three trading days have already seen a net inflow exceeding 20 billion yuan.

Additionally, whether in the Hong Kong market or the U.S. stock market, Chinese assets have been warmly pursued. Particularly, the stock prices of representative Chinese internet giants have rebounded significantly, with substantial increases.

In March, J.P. Morgan had been bearish on Chinese concept stocks, but just two months later, reality has forced a change in stance, prompting the bank to raise target prices for many Chinese concept stocks. Furthermore, in the financial reports that have been released, we have observed that numerous investment banks have been buying into these Chinese concept stocks.

From whichever perspective one looks at it, the recent depreciation of the Renminbi exchange rate was merely short-term and phase-specific. The more one looks into the future, the more one realizes the strong attractiveness of the Renminbi.