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Chinese Yuan Appreciates As Investors Bullish on Currency, Economy

September 5, 2018 at 15:02 by Andrew Moran

Various yuan banknotesThe Chinese yuan is strengthening against its US counterpart midweek, buoyed by reports that investors appear to be bullish on the currency, the national economy, and the domestic bond market. The yuan also gained momentum on a recent analysis by a Wall Street giant that the currency could gain a greater global reserve market share.

Hedge funds and money managers say China is becoming an attractive destination for foreign investors because the government has opened up its bond market to international traders. Since this offers a safe-haven asset throughout escalating trade tensions, Chinese debt primarily offers investors immunity to global market volatility. Although foreign participation is minuscule for the time being, the number is gradually increasing with overseas investors beginning to show their interest.

The federal government has facilitated the interest by exempting foreign institutions from some taxes.

Today, foreign holdings of Chinese debt totals roughly 7%.

On Monday, Goldman Sachs published a report that forecast that the yuan will boost its share of the global foreign-exchange reserves. This means that the US dollar and the Japanese yen will concede some of their market share.

The Wall Street titan projects that central banks will represent approximately 25% of the $1 trillion net inflows into the Chinese bond market by 2022. Over the next five years, the Chinese yuan share of global reserves is estimated to grow 3% to 4% annually.

If financial markets deepen faster than we expect, then these estimates could prove to be too conservative. However, there are also a number of downside risks, including the fact that reserve allocation decisions tend to be rather ‘sticky.’

According to the State Administration of Foreign Exchange, China’s current-account and non-reserve financial-account surpluses totaled $5.8 billion and $18.2 billion, respectively, in the second quarter of 2018.

The USD/CNY currency pair tumbled 0.21% to 6.8304, from an opening of 6.8444, at 14:45 GMT on Wednesday. The EUR/CNY advanced 0.11% to 7.936, from an opening of 7.9282.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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