Since the beginning of November, the offshore exchange rate of the Chinese yuan against the US dollar has fallen from an initial 7.1314 to 7.2706 as of last Friday, accumulating a decline of nearly 1400 points, with a drop of 1.81%.

At the same time, throughout October, the net capital inflow from the northbound channel of A-shares was in a state of net outflow, seemingly indicating that foreign capital is fleeing the A-share market.

Is the Chinese yuan really accelerating its decline?

Are foreign investors really selling Chinese assets on a large scale?

01

In fact, the US dollar index has been generally declining this month.

At the beginning of the month, the US dollar index started at 112.17 and once rose to 113.95, almost breaking through 114. However, by last Friday, the US dollar index had retreated to 110.68, with a monthly decline of 1.37%. This also means that the average exchange rate of the six major non-US currencies corresponding to the US dollar index has risen.

For example, the currency with the largest increase was the British pound, which rose by nearly 4% in October, and the euro also increased by 1.68%. Currently, the latest quote for the euro against the US dollar is 0.9966, very close to returning to the parity position.

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However, the Japanese yen has also been declining this month, and the decline is greater than that of the Chinese yuan. As can be seen from the chart below, the yen has also been continuously depreciating in recent days.The Japanese yen exchange rate hit a low of 151.93 at one point. Subsequently, the Bank of Japan intervened in the market, selling a large amount of US dollars and buying yen, ultimately stabilizing the yen exchange rate below 150. However, the yen still fell by 1.89% for the entire month.

If we only look at this one month, the depreciation of the Chinese yuan is indeed quite significant. Similarly, if we only look at the single month of October, northbound funds are indeed in a state of net selling.

However, if we want to look at future trends, we cannot only look at such a short period of time and must make judgments over a longer period.

So far in 2022, in the 10 months, the cumulative depreciation of the Chinese yuan against the US dollar is 14.24%, which is still less than the increase in the US dollar index, and this depreciation is also significantly lower than that of the yen.

Even after two interventions by the Bank of Japan in the foreign exchange market, the cumulative depreciation of the yen still reached 28.14%.

The depreciation of the British pound and the euro is basically the same as that of the Chinese yuan, so we see that, calculated based on the midpoint rate, the Chinese yuan has significantly appreciated against the yen, and there is also a slight appreciation against the pound and the euro.

Similarly, looking at the northbound funds over the 10 months of this year, there are currently 6 months in a state of net inflow, and only 4 months in a state of net outflow.

In addition to the funds being in a state of net inflow during this period, looking at future trends, foreign capital will also accelerate inflow.Let's take a look at some data first.

By the end of September, more than 200 foreign institutions have entered the A-share market, holding a market value of A-shares that has reached 2.8 trillion yuan, and it is still on the rise.

In the bond market, there are currently a total of 1,060 overseas institutions that have entered China's interbank bond market in various ways, and the bonds held by foreign institutions have reached 3.4 trillion yuan.

That is to say, the circulation market value of A-shares and the interbank market bonds have exceeded 6.2 trillion yuan.

Although this round of devaluation started in mid-August, by September, foreign institutions were still pouring in.

04

Why does the more the yuan depreciates, the more buyers appear?

In fact, simply put, for some medium and long-term fund choices, it is very reasonable to get involved at a low position and hold for a long time.

Further research shows that it is easy for foreign capital to enter China's stock and bond markets and obtain excessive returns.

Looking at the trend of the US dollar index, it has now reached a 20-year high. Although it may rise further in the future with the US dollar's interest rate hikes, it is believed that the Federal Reserve will soon switch from interest rate hikes to interest rate cuts due to the recession in the United States. At that time, the US dollar index may fall at a faster speed, and the yuan will also rise at a faster speed.From this perspective, foreign capital entering the renminbi asset market at this time presents an excellent opportunity for establishing a low-position base.

Of course, as foreign capital continues to buy in, renminbi assets will also help to strengthen the renminbi exchange rate more rapidly.