Domestic factors continue to be vital for yuan’s valuation

The People’s Bank of China’s latest data indicates that foreign holdings in yuan-denominated assets are still trivial. At the end of March, they accounted for around just 1.2%-1.3% of local bonds and shares. The State Administration of Foreign Exchange (SAFE) approved a total of USD 80.951bn and CNY 471.425b worth of QFII and RQFII quotas respectively by the end of March. The RQFII and QFII’s capital repatriation are unlikely to have restricted direct impact on yuan FX rate of the country’s capital markets, noted Scotiabank.

According to SAFE spokesman Wang Chunying, a US Fed interest rate rise might enhance pressure on the nation’s cross-border capital outflows in the short-term. For valuation of yuan, domestic factors continue to be important and the regulators are required to address concerns of domestic firms and consumers, according to Scotiabank.

Banks in China purchased foreign currencies worth USD 33.61bn and USD 5.42bn in the mainland’s FX spot and forward market last month. Current foreign currencies purchases underpin the opinion that companies and consumers of China remain concerned regarding yuan’s probable depreciation; however, the central bank has restated that it does not intend to depreciate yuan basket.

“We believe China’s regulators would step in firmly if needed to avoid collapses in domestic stock, bond and commodity futures markets”, said Scotiabank.