According to the China Foreign Exchange Trade System, the central parity rate of the Chinese currency RMB strengthened 122 pips to 7.0085 against the U.S. dollar Thursday. According to the data, Chinese stocks extended their rally on Tuesday, with the CSI 300 Index of shares listed in Shanghai and Shenzhen gaining 2 percent in early trading, the index surged 5.67 percent on Monday which is its biggest daily gain in five years.
"Basically, the booming stocks and currency are supported by an optimistic outlook for China's economic fundamentals, as domestic COVID-19 infections have largely been brought under control and the latest purchasing managers index showed a strong rebound," said Lian Ping, the Zhixin (HK) Investment Group Limited chief economist and Research Institute president.
The huge influx of northbound capital, which flowed from overseas to the Chinese mainland through stock connect programs linking onshore and offshore capital markets, indicated that global investors are buying Chinese stocks. The rally resulted in large demand for RMB and strengthened its value, Guan Tao, chief global economist at BOC International (China) Co., Ltd., told Xinhua.
Wen bin, chief researcher of Minsheng Bank, said that the recent recovery of capital market has accelerated the inflow of northbound capital. He said that, since July this year, the cumulative inflow of northbound capital has exceeded 50 billion yuan, which helps to maintain the balance of cross-border funds and the stability of exchange rate supply and demand, and form a support for the stability of foreign exchange reserve scale in the next stage.
Recent volatility in the global financial markets, such as the falling dollar index, has led to changes in China's foreign exchange reserves, which increased to 3.11 trillion U.S. dollars at the end of June, up 10.6 billion U.S. dollars or 0.3 percent from a month earlier, hitting their highest level since February, the State Administration of Foreign Exchange (SAFE) announced on Tuesday.
Affected by the COVID-19 pandemic and the monetary and fiscal stimulus policies in major economies, the U.S. dollar index has fallen slightly while asset prices in major countries have risen, which were the factors that led to the increase in China's foreign exchange reserves in June, according to Wang Chunying, the press spokesperson and chief economist for the SAFE.
The world's second-largest economy has remained attractive for investors despite the impact of the pandemic, and China has seen all fund types register net inflows in the first five months of this year, according to research released on Tuesday by Fitch Ratings, one of the world's three biggest rating agencies.
"The increasing global use of the RMB bolsters China's external financial resilience," said Kim Eng Tan, an analyst at S&P Global Ratings."If the RMB achieves more than 3 percent of aggregated allocated international foreign exchange reserves, it could strengthen external and monetary support for the sovereign ratings."
"Demand for RMB-denominated assets has increased in recent years, and we expect the share of RMB-denominated official foreign exchange reserves to continue to rise," said Tan.
In the second half of this year, CITIC analysts pointed out that the strong performance of RMB is expected to continue. They believe that, with further repair of domestic and foreign demand, China's economic growth in the third and fourth quarters is expected to return to above the potential growth level, which will be significantly higher than that of other major economies in the world.
At the same time, with improvement of global risk preference, the strong U.S. dollar driven by risk aversion has declined to a certain extent, although the recent U.S. epidemic has been in a certain period. However, unless the epidemic is difficult to control, the impetus to further raise the U.S. dollar index to around 100 is relatively insufficient, which will support RMB exchange rate to continue a relatively stable trend at the current level.
Tan Yaling, a scholar in the field of foreign exchange, reminds that although China's current stock price rebound and exchange rate rise smoothly, it still needs to be treated rationally. The short-term rapid appreciation of RMB does not mean that the RMB exchange rate will open a clear appreciation trend from now on. While RMB assets become a "haven", we should also be alert to becoming "cash dispensers".