On the afternoon of August 29th, the Chinese yuan experienced a strong rebound, with both onshore and offshore yuan-to-US dollar exchange rates breaking through the 7.10 threshold. Among them, the offshore yuan-to-US dollar exchange rate increased by more than 400 points during the day, while the onshore yuan-to-US dollar exchange rate once rose by over 340 points during the day. At the beginning of August, the yuan also saw a significant surge, with the offshore yuan-to-US dollar exchange rate increasing by more than 1000 points in a single day.
The yuan exchange rate, also known as the exchange rate of the yuan to foreign currencies, refers to the amount of foreign currency that can be exchanged for a certain amount of yuan. It is an important indicator to measure the value of the yuan in the international market. The yuan exchange rate is divided into onshore market exchange rates and offshore market exchange rates. The onshore exchange rate marked as CNY refers to the official exchange rate of yuan to foreign currency transactions conducted in mainland China and is regulated by domestic authorities. The offshore exchange rate marked as CNH refers to the exchange rate of yuan to foreign currency transactions conducted outside China, mainly traded in overseas regions, and is greatly influenced by market supply and demand.
Advertisement
Recently, the offshore yuan-to-US dollar exchange rate, which reflects the attitude of international investors, has risen rapidly, breaking through several important thresholds and currently standing at 7.084. This indicates that over the past month, overseas market investors have also been trading in the appreciation of the yuan. So, who exactly has driven the appreciation of the yuan?
Firstly, the domestic economy is in a recovery cycle, and the overall stable trend of the economy provides support for the yuan. For example, since July, the 1-year and 5-year LPR have each reduced by 10 basis points, followed by a 20 basis point reduction in the MLF. Additionally, the introduction of a 300 billion yuan special treasury bond for large-scale equipment updates and consumer product exchange policies will continue to boost infrastructure investment growth. Overall, under the trend of policy stimulus and domestic economic repair, overseas confidence in the domestic economy has increased, providing support for the strengthening of the yuan.
Secondly, the recent weak performance of the US dollar overseas is also one of the important reasons for the change in yuan exchange rate expectations. Recently, many of the economic data released by the United States have been lower than expected, with inflation and employment both cooling down. In July, the CPI year-on-year growth rate dropped to 2.9%, and the core CPI also maintained a downward trend, further confirming the cooling trend of prices. Powell's dovish stance at the Jackson Hole Economic Symposium may have essentially confirmed the start of the Fed's interest rate reduction cycle. The market currently widely expects the Fed to cut interest rates by at least 25 basis points at the September interest rate meeting, and the recent weakness of the US dollar has led to the corresponding strengthening of the yuan.
In addition to this, the rise in global risk aversion is also an important factor in the strengthening of the yuan. For example, geopolitical conflicts in the Middle East continue, and there are still uncertainties in the US elections. In comparison, the stability of the yuan may be favored by international capital, becoming an important concentration for global capital to avoid risks.
The continuous strengthening of the yuan overall reflects the resilience of the domestic economy. Under the strengthening of the yuan, the adjustment of domestic monetary policy and the flow of funds at home and abroad will have a positive impact on the capital market.
On one hand, monetary policy. The appreciation of the yuan provides more flexibility for the monetary policy of the People's Bank of China. Currently, there is a high degree of uncertainty in the global economy. Under global easing, domestic monetary policy still has a large room for maneuver. Based on the appreciation of the yuan, it can be more relaxed. For example, if the Fed's interest rate cut is implemented, the market generally expects that domestic monetary and policy may also have the possibility of further easing, and the market's expectations for reserve requirement ratio cuts and interest rate cuts may also be realized. Under a loose monetary policy, theoretically, it provides liquidity to the market and also boosts the stock market to a certain extent.On the other hand, the appreciation of the Chinese yuan attracts international capital to flow back. According to a report by the Institute of International Finance (IIF), the total amount of foreign capital attracted by China in 2024 is expected to reach 200 billion US dollars. With the appreciation of the yuan, foreign investors' confidence in yuan-denominated assets is enhanced, which may lead to increased investment in China's stock and bond markets. The return of capital that previously fled, such as northbound funds, is worth looking forward to, and once it flows back, the boost to the stock market is self-evident.
Of course, it should be noted that the sustainability of the yuan's appreciation still needs to be closely monitored in relation to the performance of the domestic economy. At present, the overall repair of the domestic macroeconomy is relatively weak, and the lack of elasticity is also an objective fact. Previous monetary and fiscal policies have signaled a stronger commitment to stable growth, but the effectiveness of these policies still needs to be verified by data. With the annual growth target already set, it is worth paying attention to the potential intensification of policies in the second half of the year. For the stock market, further repair of the domestic fundamentals and the substantial release of liquidity remain the core factors affecting the market. Currently, with marginal improvements in both, there may be a short-term boost, but whether it can continue to improve will still depend on the certainty of the improvements.