China’s financial market reform stokes rally in yuan to four-month high

11-Jul-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

The yuan’s exchange rate strengthened above the psychologically important level of 7 per US dollar on Thursday, as optimism over new policies liberalising China’s financial markets helped attract foreign capital.

The benchmark Shanghai Stock Exchange has risen more than 9 per cent so far this week, putting it on a course for its best weekly performance in five years and helping drive the appreciation of the yuan.

Analysts said the rally in stocks, reflecting funds flowing into China, was boosted by commentary about a “healthy” bull market in the state-backed China Securities Journal over the weekend, which helped counter the bearish sentiment that followed the passage of the new national security law for Hong Kong last week.

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China last week unveiled details of a long awaited scheme linking wealth management services between Hong Kong, Macau and cities in the Greater Bay Area. Local media also reported that the China Securities Regulatory Commission was considering granting securities licenses to at least two major commercial banks as part of a pilot scheme.

Other positive policy developments include the simplification of a registration system for initial public offerings on the ChiNext board, the relaxation of state-owned enterprise listing in the domestic market, and the introduction of derivative products in Hong Kong for mainland-traded shares.

“The timing of announcing market reforms is quite important, since it was around the time of the passing of the national security law in Hong Kong,” said Tommy Wu, lead economist at Oxford Economics. “It is a timely reminder to foreign investors not to worry so much, and that opening up measures in China are indeed materialising.”

Ken Cheung, chief Asian currency strategist of the East Asia treasury department at Mizuho Bank, noted that China Securities Journal published another article this week calling for investors to be mindful of “irrational exuberance” in what was likely aimed at slowing the stock market rally.

The stock market surge is inviting comparisons with China’s bubble that burst in 2015. However, the key differences between then and now is the lower starting point for equity valuations and the lower amount of debt used to finance stock purchases.

China has limited room to stimulate the economy through its fiscal budget and monetary policy, so a bull market can probably help instead

Ken Cheung

“Policymakers are supporting stock market sentiment in an effort to help the economic recovery,” Cheung said. “China has limited room to stimulate the economy through its fiscal budget and monetary policy, so a bull market can probably help instead.”

The yuan rose 0.24 per cent to 6.98 per dollar on Thursday, its strongest level since March 13, with many traders expecting it to strengthen further to around 6.95 in coming months.

A lower exchange rate figure means it takes fewer yuan to purchase one dollar, so the decline in the yuan below 7 to the dollar is a strengthening of the Chinese currency.

Sim Moh Siong, currency strategist at Bank of Singapore, upgraded his yuan forecast to 6.80 per dollar within the year, citing a weaker US currency on increasingly clear signs of economic growth divergence in favour of China compared to the rest of the world.

“We are turning more positive on the yuan after the currency struggled over the past two years due to the tariff war [with the US],” said Sim, currency strategist at Bank of Singapore. “China has recovered earlier than the rest of the global economy, backed by policy support and a better pandemic response.”

Recent economic data has shown improvement, with China’s official manufacturing purchasing managers’ index for June edging up to 50.9, beating analysts expectations, and higher than May’s reading of 50.6.


Category: China

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