Economic Daily:

What is the current situation of foreign investors investing in yuan assets? What changes do you see in the future? Thank you.

Wang Chunying:

Thank you for your question. I am going to answer your question from the following aspects.

In recent years, the overall scale of foreign investment in yuan assets has risen, and China has gradually become the leading force in absorbing portfolio investment among emerging economies. Last year, under high inflationary pressure, the Fed rapidly tightened monetary policy, and as a result, both the exchange rate and interest rates of the US dollar rose significantly. The scale of cross-border bond investments absorbed by countries worldwide decreased greatly, and the stock markets of major emerging economies saw a retraction of funds. Under such circumstances, China's foreign exchange market and securities market remained stable, although China also faced the impact of Sino-US interest rate differentials on the yuan exchange rate and investment adjustments of foreign funds in the Chinese securities market. The investments of foreign central banks and banking institutions in China's bond market were relatively stable, and foreign capital in the China's securities market showed a net inflow overall. The changes in the scale of cross-border capital inflows and outflows under securities investment did not change the overall equilibrium of BOP in China.

With the improvement of the internal and external environment in recent months, foreign investment in Chinese securities was on an upward trend. First, China's economy has steadily recovered, and market expectations have been boosted. Foreign investors have become increasingly enthusiastic about investing in yuan assets. Second, due to multiple factors, the exchange rate and interest rates of the US dollar have recently fallen from their high levels, and the spread inversion of 10-year treasury bonds between China and the US has tended to converge, having narrowed by half from a peak of 1.5 percentage points to the current level of about 0.7 percentage points. In January 2023, the net increase in China's domestic shares held by foreign investors hit a record high; in March, the balance of China's domestic bonds held by foreign investors rebounded from February.

In the future, foreign investors will continue to invest in China's securities market, as they are attracted by several advantages of the renminbi assets: steady profitability, high investment value and strong appeal for investors seeking to diversify portfolio. I'll touch on each of these briefly.

First, the yuan's value is stable, which keeps foreign investors from big exchange losses. The yuan exchange rate has remained generally stable at an appropriate and balanced level in recent years. Even in 2022, when the external environment is complex and volatile, the fluctuation of the yuan exchange rate was significantly lower than that of the Japanese yen, the British pound, the euro, and major emerging market currencies. Thus, foreign investors will not suffer significant exchange losses in holding yuan assets.

Second, the yuan-denominated assets have strong appeal for investors seeking to diversify portfolio. China's economic cycle is not synchronized with that of major developed economies. The macroeconomic policy, the interest rate, exchange rate and asset prices in China are relatively independent, which endows yuan assets with a better diversification effect in global asset allocation. People who make investments understand this point, and appreciate it. At the same time, China's bond market is the second largest in the world in terms of size, which means we have good liquidity. With the characteristics of safety and liquidity, the yuan assets have gradually become quasi-safe assets.

Third, the yuan bond price is less volatile with stable returns. From a global perspective, volatility in yuan bond returns is low. In most cases, the higher the volatility, the riskier the security, so it means that the investment return of yuan bonds is more stable. According to the calculation, last year, the volatility of annualized monthly return of the yuan treasury bond index was 2.4%, and that of the US dollar bond was 6.6%. Through such a comparison, we can find out that the yuan bond price is less volatile with stable returns.

Fourth, China's securities market is undervalued and has good investment prospects. No matter the price-to-earning (P/E) ratio or price-to-book (P/B) ratio or other indicators, the current valuation of A shares is relatively low, so the investment value is comparatively high, and the potential risk is relatively low.

Overall, China's economy will progressively improve, its financial market will steadily open up, and there is still potential for foreign investment to enter the country. At present, foreign investors' current holdings of both onshore stock and bond portfolios are at low levels, so there is ample room for them to invest in China's securities market.

This is my response to your question. Thank you.