RMB Robust Despite Stronger Dollar, Foreign Holdings of Chinese Debt Hit Record High


The resurgent strength of the US dollar is doing little to diminish the health of the Chinese yuan, while foreign holdings of Chinese bonds have lifted to unprecedented levels.

After dropping from 103.8 at the start of 2017 to 88.15 at the outset of 2018, the US Dollar Index recently posted a rally in April with a rise of almost 5%.

The renminbi has also remained strong however, rising by around 2% against the dollar since the start of 2018, and nearly 8% over the past year.

The China Foreign Exchange Trade System (CFETS) RMB Index lifted from 94 last year to 97.59 in May, attesting to the strength of the Chinese yuan against a basket of currencies.

Some analysts say the strength of the yuan amidst a recovery in the greenback points to the Chinese currency’s final emergence has a “safe haven asset” in 2018, with foreign holdings of onshore yuan-denominated government debt increasing significantly.

Official data from April indicates that foreign holdings of Chinese government bonds have risen to 6.29% of the market total, for an increase of 1.32 percentage points since the start of the year, while foreign holdings of the Chinese bond market as a whole have risen to an historic high of 1.98%.

The Bond Connect initiative has become increasingly active, with average daily transaction volumes in April lifting to 3.11 billion yuan, for a rise of 159% compared to the daily average for the preceding three months.

“The central bank’s funds outstanding for foreign exchange haven’t changed considerably – the robust rise in fund-inflows under the capital account is playing a supporting role for the yuan,” said Ju Xiaojin (巨晓津) from the Bank of China offshore transaction centre to Yicai.

“Given that the renminbi accounts for 10.92% of SDR, allocations of foreign capital to the renminbi remain low.”