As the U.S. economy continues to be bullish, the U.S. dollar and U.S. bond rates are rising, while Chinese stocks and currencies and other financial assets are being sold off by the market.
The U.S. economy continues to be bullish and the U.S. dollar and U.S. bond rates are moving higher, while Chinese stocks and currencies and other financial assets are being sold off by the market.
Recently, the mainland stock market and the yuan exchange rate against the U.S. dollar have been moving down. Reuters reported on April 12 that the mainland’s stock market selloff since mid-February marked a reversal of risk-taking from April 2020 to January 2021, and led to the worst monthly performance of China’s CSI 300 index in a year in March.
The CSI 300 index of A-shares recently erased an 11% gain before the Yellow New Year; the yuan fell 1.28% against the dollar in March, the biggest monthly decline since August 2019; and the 10-year Treasury yield oscillated near a high of 3.2%, as March also saw the first reduction in Chinese government bond holdings by foreign institutions in two years, according to a Bloomberg analysis cited by Yahoo News 14.
In response, Zhou Hao, senior market economist at Commerzbank, believes that there has been a clear change in the market’s view of the dollar. A strong recovery in the U.S. economy is expected in the next two years, which will have a siphoning effect on emerging markets.
Thanks to new stimulus measures, accelerated vaccinations and easing of corporate restrictions, economists have raised their estimate of the U.S. second quarter GDP growth to 8.1% on an annualized basis. Despite the latest Fed minutes indicating that easing will remain, expectations of a rise in the US bond yield above 2% are growing, attracting capital flows back and pushing the dollar higher.
Under the pressure of this environment, the yuan may continue to weaken against the dollar. Institutions including BNP Paribas and Commerzbank believe that the yuan will fall to 6.8 or even weaker against the dollar within the year.
The Huaxia Times reported that due to the continued appreciation of the U.S. dollar, the renminbi has been in depreciation mode since mid-February, and on March 30, the renminbi hit a new low against the U.S. dollar in the mid-price, spot market and offshore market since December 2020. Since December 2020, the onshore yuan has reached a high of 6.4236, and in four months’ time, US$100,000 has been convertible to an additional RMB14,000. And the yuan is still falling. On April 9, the onshore yuan was at 6.5526 against the U.S. dollar, while the offshore yuan was at 6.5668 against the U.S. dollar. In the three trading days counting from April 7, the offshore yuan exchange rate has fallen by a cumulative 143 points, depreciating 0.23%. The yuan has depreciated against the dollar for seven consecutive weeks.
Meanwhile, the slowdown in capital inflows into China may also be putting pressure on the yuan to some extent, with Bloomberg data showing net outflows of land and Hong Kong stock market funds from the mainland so far in April.
Meanwhile, overseas investors are also reducing their holdings of mainland government bonds, with foreign institutions reducing their holdings of about 16.51 billion yuan of Chinese government bonds in March this year, ending a previous streak of 24 months of increased holdings.
Foreign investors have also become cautious, as their purchases of mainland stocks through the China Stock Exchange plummeted in March, and the yuan depreciated against the dollar during the same period, Reuters said.
And Chinese investors are cutting their stock market exposure to safe-haven money market funds (MMFs) as tighter mainland policies and high valuations have led to concerns that authorities are cracking down on stocks and causing them to fall from their highs. Money market funds have traditionally been considered low-risk and more liquid assets as they invest in higher quality assets, including public debt.
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