During the recent National Day holiday in China, many people found themselves in high spirits, particularly investors in the A-shares marketAfter languishing for three years, the A-share market finally burst into life starting September 24, witnessing an impressive five consecutive days of growthThis surge created an undeniable “profit effect” in the market, drawing in retail investors who found that almost any stock they purchased yielded gainsIndeed, many individual investors managed to recover all their losses incurred in the first nine months of the year within just five days of trading.

As the holiday approached, with the A-shares market closed, an unprecedented sentiment among investors emerged—the yearning for the holiday to extend to ensure the market's upward momentum continuedWith hopes pinned on the reopening of the A-share market on October 8, there remains a pressing need to focus on concerning developments that might detract from this bullish trend.

The first indication of worry comes from the performance of the offshore Chinese renminbi, which recently fell below the critical threshold of 7.05 against the U.S. dollarThere isn’t outright evidence suggesting a direct correlation between exchange rates and stock market performance; however, a weakening renminbi typically poses challenges for stock market progressOn September 27, the offshore RMB briefly broke the 7.0 mark, hitting 6.97, following reductions in interest rates by the Federal Reserve, leading many to believe that such monetary easing would favor currencies like the renminbi.

Contrary to expectations of a weak dollar aiding the renminbi, in recent days, the dollar's value has instead climbedFrom September 30 onward, the offshore renminbi has depreciated for five consecutive days, crossing several significant levels to reach 7.056. This might raise eyebrows, as the anticipated weak dollar scenario does not seem to align with the reality of the current market.

Simultaneously, another significant Asian currency, the Japanese yen, has also begun to weaken, its exchange rate plummeting from 139.5 to 146.6, despite the Federal Reserve's decision to lower interest rates and the subsequent expectation of further rate cuts in the near future

Advertisements

If a weaker dollar was anticipated, its performance has been surprisingly robust.

Meanwhile, in the face of the exuberance in the A-share market and the holiday closure, foreign capital has been aggressively seeking out investments in Hong Kong stocks, soon ready to pivot towards A-shares through the Hong Kong Stock Connect or Qualified Foreign Institutional Investor (QFII) routesTop global financial firms such as BlackRock and HSBC have raised their ratings on A-shares to "overweight," while Morgan Stanley has predicted at least an additional 15% growth potential for these stocksThis enthusiasm from foreign investors raises questions: if they have such confidence in the A-shares, why are we witnessing depreciation in the renminbi?

The inexplicable scenario calls for caution among investors, compelling them to maintain a watchful eye on the future trajectory of the renminbi, particularly in the wake of the A-shares reopening on October 8.

Another troubling finding is the decline in China's foreign exchange reserves, which plunged to a multi-month low in Q2, making it the seventh largest globallyEvaluating a currency's internationalization entails various metrics, including its usage share, reserve amount, and investment patternsOne commonly noted dimension involves the currency share of international payments, where the renminbi presently holds a 4-5% share, ranking fourth, while the dollar dominates with roughly 45% over the years.

Many analysts argue that the SWIFT data does not fully encapsulate the significance of renminbi transactions executed via China International Payments System (CIPS). Such a stance raises further questions about the actual internationalization of the renminbiExploring a different facet, every country maintains foreign reserves, which can be interpreted as the nation's wealthThe proportion of different currencies against the total reserves indicates each currency's desirability and acceptance on the global stage.

Latest updates from the International Monetary Fund reveal that out of a staggering $12.3 trillion in global foreign exchange reserves, $11.5 trillion can be identified by currency

Advertisements

Advertisements

Advertisements

Advertisements