Battered by the COVID-19 pandemic since March 2020, the world's major economies have adopted looser monetary policies as well as expansionary fiscal policies. The combined impact of the epidemic and these stimulus policies have initiated big swings in the global financial market. In a bid to skirt their losses, investors rushed to offload risky assets and buy safe assets. At first, funds kept flowing out of the bond markets in emerging economies, with China as an exception.

Since early 2021, with the recovery of major developed economies, bond yields have risen rapidly, and bond markets in emerging economies mostly have attracted a limited inflow of foreign capital. The Chinese bond markets are booming. The first quarter of this year saw a 173.4-percent jump in Chinese bonds purchased by overseas institutions on the interbank market.

The two waves of foreign capital influx into China are evidence that international investors consider renminbi assets a safe haven, the proverbial olive branch extended to international capital seeking risk-free refuge.

According to statistics from the State Administration of Foreign Exchange, since early 2021, the exchange rate of the yuan against the U.S. dollar has stayed between 6.46 and 6.55, maintaining a much more stable level than many other major global currencies.

From January to March, the actual use of foreign capital by non-financial businesses in China saw an increase over the same period of 2019 and 2020. This outcome should be partially attributed to China's economic recovery ahead of other nations thanks to its effective epidemic control. In January and February, the outbound investment of non-financial Chinese businesses remained on par with those of 2019 and 2020 during the same period.

The performance of China's foreign exchange market highlights a resilient and strong yuan in a global environment. That's one reason why international investors opt for renminbi assets as their safe haven.

Safe-haven assets help ensure stable investment while reining in speculation. This is an important feature of the ideal international currency.

China has taken a cautious attitude toward renminbi internationalization. In late 2015, the yuan was added to the International Monetary Fund's special drawing rights currency basket. In the following years, it managed to maintain a stable value both at home and abroad. Its share in reserve assets as well as international settlements is on the rise.

China's central bank is gradually internationalizing the renminbi exchange rate. Cities such as London have seen the establishment of offshore yuan markets. China has currency swap treaties with many countries, with several adding the renminbi to their foreign exchange reserves. For financial security reasons, however, China has yet to lift its control over capital account convertibility. As a result, the renminbi is not used in larger amounts on the international market.

The renminbi's global status lags far behind that of the Chinese economy. China is the second largest economy and the biggest foreign trade power in the world, but the renminbi accounted for only 2.2 percent of global settlements in the SWIFT system this February. In 2020, the renminbi made up only 2.25 percent of global foreign exchange reserves.

Given China's deep connection with the global economy, greater openness on the part of China will assist with the free movement of capital, talent, technology, data and services.

Against this backdrop, international capital may increasingly resort to renminbi assets as their safe haven, revving up demand for the currency. The trend might spur on renminbi internationalization, but at the same time pose new challenges to China's financial regulators.

(Print Edition Title: Safe haven for international capital)

Copyedited by Elsbeth van Paridon

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