China's status as a safe haven for investors in a turbulent world has been strengthened in recent days. On Friday, the onshore yuan rose more than 100 points against the US dollar, while the offshore yuan's exchange rate against the US dollar briefly hit a four-year high of 6.32, despite a looming US interest rate hike.
As of January, the net increase of domestic renminbi bond holdings by foreign institutions had risen for 10 consecutive months. The continued inflow of funds and the strength of the renminbi are mutually reinforcing. The continued inflow of international capital is a vote of confidence in China's economic prospects.
Since the beginning of the year, the economic cycles of China and the United States have become clearly differentiated and manifested in the separation of monetary policy. The European Union and the United States have begun to implement monetary tightening policies to deal with inflation, while China has adopted loose monetary policies to stabilize the economy, including cutting the reserve ratio requirement and interest rates.
Historically, a rise in US bond yields will attract a backflow of capital, and interest rate cuts by China would reduce capital inflows. The combination of policies would usually lead to capital outflows from China. However, data from January showed that although the net increase in overseas holdings of domestic renminbi bonds fell by 5 percent month-on-month, it was still in a net increase.
There are good reasons for international investors to remain bullish on the Chinese bond market. The yields on Chinese bonds remain relatively high and stable. China's complete supply chain and its dynamic zero-case COVID-19 epidemic prevention and control practices enable the country's huge manufacturing industry to create more trade surplus. And China's healthy balance of payments give strong support to the exchange rate of the renminbi. That means buying Chinese bonds is safer and more profitable in terms of interest rates and exchange rates. As for the US, it is uncertain whether the high inflation rate and the fragile financial system can withstand continued interest rate hikes, and the potential risks fluctuate.
China is the only emerging market economy that has enough space to deal with large-scale capital inflows. This strengthens the safe haven status of the Chinese bond market, especially against the backdrop of rising risks in the EU and US financial markets.
This means that China has begun to change from an economy influenced by the Fed's policies to a country with enhanced monetary policy autonomy and a more attractive capital market.