USD/CNY Tests 6.9 As Inflows Into Chinese Bonds Hit Record in July

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The Chinese yuan continues to strengthen against the US dollar as the currency pair tests the 6.9 mark. In the middle of the trading week, the yuan is being driven by global benchmark indexes being bullish on Chinese bonds, despite the world’s second-largest economy increasing its debt issuance in the aftermath of the coronavirus pandemic.

International investors are embracing Chinese bonds for the first time in a long time. Although bond traders have largely shied away from debt from the economic superpower, Chinese bonds have been seeping into overseas funds in New York and London. The main reason for this trend has been Beijing instituting market-oriented reforms and opening up its financial markets to the outside world.

Overall, Chinese bonds have overperformed compared to other debt markets. For example, the FTSE China government bond index has advanced more than 4% over the last 12 months.

With this type of performance, it makes sense that foreign inflows to Chinese bonds are at an all-time high. According to Exante Data, which monitors the movement of capital worldwide, foreign inflows to Chinese bonds topped $33.5 billion in the second quarter. Last month, inflows totaled $20 billion, the best single month performance on record.

Meanwhile, in other news, the People’s Bank of China (PBoC) recently confirmed that the central bank would no longer be as aggressive in supporting the economic recovery since the numbers are coming in better than expected. The PBoC ensured ample credit throughout the economy, but new bank lending tumbled more than initially anticipated last month.

According to new PBoC data, financial institutions approved $142 billion in new yuan loans in July, down from the more than $200 billion in June. The reading was also worse than the median estimate.

The broad M2 money supply data also fell 0.4% to an annualized rate of 10.7% growth in July.

Julian Evans-Pritchard, a senior China economist at Capital Economics, told the South China Morning Post:

“Broad credit growth hit its highest level in nearly two and a half years as a pickup in direct financing and shadow credit offset slower issuance of bank loans. This acceleration should continue in the months ahead.”

The USD/CNY currency pair dipped 0.12% to 6.9374, from an opening of 6.9463, at 18:34 GMT on Wednesday. The EUR/CNY advanced 0.32% to 8.1802, from an opening of 8.1556.

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