- 2024-06-20
- News
"Surge in Chinese Stocks: Foreign Investors Frenetically Buy Assets"
Believe that most people are in good spirits during this National Day holiday, especially stock investors. After three years of silence, the A-share market has finally erupted, with five consecutive trading days of sharp rises starting from September 24th. The "profit effect" in the market is evident, and it seems that one could make money by blindly buying any stock. Many retail investors have managed to recoup their losses from the first nine months of the year in just five days.
As the National Day holiday approaches and the A-share market is closed, this might be the first time people wish not to have a holiday, hoping that the three major stock indices continue to perform well. However, while we anticipate the A-share market's heroic performance after its reopening on October 8th, we should also pay attention to some potentially less optimistic news that could affect the stock market.
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Firstly, the offshore RMB has broken through the 7.05 mark. There is no evidence to suggest a direct impact of exchange rates on the stock market, but generally speaking, a weak currency makes it difficult for the stock market to perform well. On September 27th, the offshore RMB exchange rate once broke through the 7.0 mark, with a value of 6.97 reaching a recent high. This was related to the United States entering a rate-cutting cycle and the Federal Reserve announcing a 50 basis point reduction in the federal funds rate.
As the weak US dollar seemed to take shape, the dollar's value has unexpectedly risen in recent days. The offshore RMB has depreciated for five consecutive days since September 30th, breaking through several integer levels, and is now at 7.056. At the same time, another major Asian currency, the Japanese yen, has also started to weaken, with the exchange rate falling from 139.5 to 146.6. It should be noted that this is happening despite the Federal Reserve having already cut rates and with expectations of at least another 50 basis points reduction in the federal funds rate over the next two months. The so-called weak US dollar does not seem that weak.
Faced with the booming A-share market and the National Day holiday, foreign capital has been frantically buying Hong Kong stocks in recent days, ready to make a significant purchase of A-share assets through the Stock Connect or QFII channels after the market opens. BlackRock, HSBC, and others have upgraded their A-share ratings to overweight, while Morgan Stanley has indicated that the A-share market still has at least a 15% rise ahead.
Since foreign capital is so optimistic about the A-share market and has already begun to lay out its strategy, the first step is to exchange foreign currency for RMB, which would raise the value of the RMB. So why has the RMB depreciated for five consecutive days recently? This is a strange occurrence that does not match up.
When things are out of the ordinary, there must be a reason. Investors need to be cautious and continue to monitor the future trend of the RMB, especially after the A-share market opens on October 8th.
Secondly, the RMB foreign exchange reserves in the second quarter have reached a multi-month low, falling to the seventh position globally.There are multiple dimensions to measure the degree of internationalization of a currency, including usage share, reserves, and financing and investment. What we usually focus on is the usage share. SWIFT publishes the payment share of currencies from various countries every month. The renminbi ranks fourth with a level of 4% to 5%, while the US dollar has long been maintained at around 45%.
Many people believe that SWIFT does not count the renminbi transactions settled through our own CIPS system. This view is actually problematic, and I have explained it many times before, so I will not repeat it here.
Let's observe the degree of internationalization of the renminbi from another dimension. Every country has foreign exchange reserves, which is equivalent to the money in the national treasury. The proportion of different currencies in the total foreign exchange reserves of various countries reflects their popularity and pursuit.
The IMF recently updated the distribution of official foreign exchange reserves for the second quarter of 2024.
Out of a total of $12.3 trillion in foreign exchange reserves, $11.5 trillion is identifiable by currency. Among them, $6.7 trillion is the US dollar, accounting for 58% of the total identifiable foreign exchange reserves, ranking first with a significant advantage; the euro is $2.3 trillion, accounting for about 20%; the yen and the pound are ranked third and fourth with $641.1 billion and $565.9 billion, respectively.
The renminbi has always been ranked fifth, but starting from the first quarter of 2023, it was surpassed by the Canadian dollar, and in the first quarter of this year, it was surpassed by the Australian dollar. The latest ranking is seventh, with a total of $245.2 billion, accounting for 2.1%.
It is worth noting that compared to the first quarter, the amount of Australian and Canadian dollars as foreign exchange reserves increased in the second quarter, while the renminbi decreased quarter-on-quarter. This means that the gap between the renminbi and these two non-SDR weighted currencies has widened.
On one hand, we are promoting the internationalization of the renminbi and currency swaps in our own currency, but on the other hand, the amount of foreign exchange reserves in the form of renminbi held by countries around the world is decreasing quarter by quarter. Could it be that governments around the world are exchanging the renminbi they obtain for other currencies such as US dollars, euros, and yen?
If this is the case, we must question the degree of acceptance of the renminbi. Will some foreign governments only use the renminbi as a transition and bridge, with the ultimate goal of exchanging it?
In summary, although the A-share market has shown a strong upward trend in the near term, pleasing many investors, we still need to remain calm and closely monitor potential risk factors affecting the stock market. The continuous depreciation of the offshore renminbi and the decline in the global ranking of renminbi foreign exchange reserves are warning signs that should not be ignored.These factors may not have a direct impact on the short-term trends of the A-share market, but in the long run, they can have a profound influence on the stability of the market and investor confidence. Therefore, while investors enjoy the benefits brought by the rise in the stock market, they should also be prepared for risk management, analyze market dynamics rationally, and avoid blindly following the crowd.
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