Balanced forex market boosts nation's ability to withstand external shocks

Cross-border capital flows rose in the second quarter of this year in China, adding further strength to the yuan and stabilizing the prices of yuan-denominated bonds and shares, despite fluctuations in the global financial markets, the foreign exchange regulator said on Friday.

The cross-border capital flows were generally stable and the foreign exchange market was mostly balanced in the first six months of this year, while China's ability to respond to external shocks was also significantly enhanced, the State Administration of Foreign Exchange said.

Foreign exchange settlement and sales by banks netted a surplus of $78.6 billion in the first half of this year, indicating that more enterprises and individuals preferred to hold yuan-denominated assets, especially for onshore bonds and shares. Foreign exchange sales by banks for their clients exceeded the total foreign exchange settlements in June, leading to a deficit of 21.7 billion yuan ($3.1 billion), the first deficit since November 2019, according to SAFE data.

The data reflected that demand and supply remained largely stable in the first half, barring the surplus contracted in June, mainly due to the quarterly dividend distribution in foreign-listed and foreign-invested enterprises, said Wang Chunying, deputy head and spokeswoman of SAFE.

"Cross-border capital flows showed a generally stable trend, and the net inflows in the second quarter have increased," Wang said.

The yuan exchange rate index designed by the China Foreign Exchange Trade System increased by 0.7 percent in the first half of this year, with foreign investors increasing their holdings of onshore bonds and shares by $72.9 billion.

The world's second-largest economy rebounded significantly in the second quarter, reporting a 3.2-percent GDP growth from a year earlier, compared with the 6.8-percent contraction in the first three months, which was well above market expectations.

Economists expect the upturn in China's economy to continue in the second half of the year, and exports to pick up gradually along with the recovery of global demand. The optimistic outlook will be supported by the improved sentiment after the country's successful containment of the COVID-19 epidemic and significant fiscal and monetary policy easing.

The sustainable recovery momentum will continue to support a strong yuan and its exchange rate will remain flexible in the coming months, said a SAFE official.

On Friday, the Ministry of Finance said it will sell yuan-denominated sovereign bonds worth $714 million in Hong Kong. According to experts, the measures will further strengthen the yuan's position in the offshore market.

The bond issuance will also support the yuan's liquidity in overseas markets, facilitate the internationalization of the Chinese currency and stabilize the offshore exchange rate, experts said.

The currency internationalization index, which measures the share of major currencies in the international monetary market and is published by the International Monetary Institute of the Renmin University of China, indicates that the yuan is closing in on the pound sterling and the Japanese yen after a decade of the "internationalization" process, said Di Dongsheng, associate dean of the School of International Studies at the Renmin University of China.

With the renminbi driving the world's second-largest bond market, global investors will have access to a wider pool of yuan-denominated assets. Other factors, such as more free flows of capital account funds and the market-oriented interest rate reform, will help expand the global use of yuan, said Di.