Capital Inflow Will Help Stabilize The RMB Exchange Rate.

China Foreign Exchange Trading Center issued a commentator article that the people's Bank of China recently released micro-blog said, "in October 1, 2016, the yuan will formally join the International Monetary Fund (IMF) special drawing rights (SDR) currency basket. Recently, some international financial institutions, offshore central banks and other offshore central bank institutions and financial institutions to increase the allocation of domestic RMB bond assets.

China's interbank bond market related service providers will continue to provide convenience. "

This shows that when the yuan is about to formally join the SDR basket of currencies, the demand for RMB bonds assets of international investors is further increased, and the corresponding capital inflow will help stabilize the RMB exchange rate.

After the RMB has officially joined the SDR basket of currencies, we should continue to implement a regulated and managed floating exchange rate system based on market supply and demand and reference to a basket of currencies.

The article said that at present, the driving force of foreign institutional investors to increase renminbi bond assets mainly stems from four aspects.

First, the basket of Renminbi makes some overseas institutional investors holding SDR assets need to adjust their asset allocation according to the new SDR basket. Some overseas central banks will also increase their holdings of RMB as reserve assets, which will bring corresponding demand for RMB exchange and bond investment.

Second, the relatively high yield of RMB assets has great attraction for international investors.

After the international financial crisis, the major developed economies continued to implement loose monetary policy, resulting in low interest rates in their money market and bond markets, and the global negative interest rate bonds had exceeded $13 trillion.

In comparison, China's interest rate is obviously better than that of the developed economies. The yield spreads of the 1 year treasury bonds between China and the United States basically remain above 1.5 percentage points, while the sovereign ratings are higher than others.

China's bond market is more attractive to international capital.

Third, the continuous promotion of financial reform will enhance the attractiveness of China's domestic financial market.

On the one hand, the exchange rate marketization reform continues to push forward, and the rules, pparency and marketization level of the exchange rate formation mechanism are constantly improving, making the RMB exchange rate elasticity of exchange rate strengthened against the US dollar while maintaining a basically stable exchange rate for a basket of currencies, enhancing the confidence of overseas investors in configuring and holding RMB assets. On the other hand, since 2015, the people's Bank of China has promulgated a series of foreign exchange market and bond market opening policies successively, providing a wealth of financial products that manage exchange rate and interest rate risks, and also facilitating the exchange and hedging of foreign investors.

Fourth, as China's financial market deepens its development and opens to the outside world, the next step is that China's bond market is expected to join the main global bond indices, which are about $50 trillion globally tracking asset allocation.

A shares are also expected to join the main stock index, with global tracking assets reaching US $10 trillion.

All these will help further attract international capital to allocate domestic bonds and stock assets.

Foreign investors' holdings

Bond assets help to sustain long-term capital inflows.

The essential link for foreign investors to allocate domestic Renminbi bonds is to exchange Renminbi, which will inevitably bring capital inflow. And foreign institutional investors who invest in interbank bond market are mainly medium and long-term investors. Their investment in the market can effectively increase the capital flows in the medium and long term.

At the same time, more foreign institutional investors enter the inter-bank bond market, which is also conducive to promoting the development of China's bond market, bringing diversified investment needs and investment strategies, improving the service level and international competitiveness of infrastructure and market members in the domestic market.

The increasing investment demand for offshore institutional bonds will also help reduce social financing costs, support real economic growth and strengthen economic fundamentals.

All of these will help create a more attractive market.

To form a virtuous circle and drive more long-term capital inflows.

It is foreseeable that in the future, with the RMB's formal accession to the SDR basket of currencies and the further opening up of China's financial market, the capital inflow of foreign investors' holdings of RMB bond assets will continue to help stabilize the RMB exchange rate.

At the end of 8 2016, the total custodial amount of China's bond market was 59 trillion and 500 billion yuan, of which, offshore investors accounted for less than 2% of the total trusteeship, which is far below the average level of more than 20% in developed economies, and far below the average level of 10% in emerging markets. Overseas investors have great potential in investing in China's bond market.

The RMB exchange demand brought by foreign investors entering the market will produce considerable foreign exchange supply with China's significant trade surplus, which will continue to support the RMB exchange rate.

In the case of domestic main foreign currency debt deleveraging has been basically completed, and the growth of foreign direct investment has stabilized, the capital flow will be balanced as a whole.