(Yicai Global) Oct. 20 -- The Chinese yuan has appreciated to its strongest level against the US dollar since June, falling below 6.4 to the greenback, largely buoyed by swollen foreign exchange cash deposits and a strong export market.

The onshore yuan logged 6.3956 against the dollar in morning trading today, 0.2 percent stronger than yesterday’s close.

China’s forex cash deposits amounted to USD1 trillion in August, Zhang Meng, a macroeconomics and foreign exchange strategist at UK lender Barclays, told Yicai Global. This meant that companies with big dollar holdings did not need to quickly buy more forex as the dollar index rose, which has helped stabilize exchange rate fluctuations, she added.

China’s exports continue to hit record highs, despite earlier predictions that they might start to wane. In September, China’s exports valued in US dollars surged 28.1 percent from a year ago to USD305.74 billion, passing the USD300 billion mark for the first time.

The advance against the greenback was despite slower-than-expected economic growth in the third quarter. But the favorable balance of payments has created a strong support for the yuan in the short term. Also, there are not many speculative positions in offshore and onshore markets, making it costlier to short the yuan, Zhang said.

China's current account surplus stood at USD123 billion in the first half, still a large amount even though it is half what it was in the second half last year, Zhang said. In the past year, the positive correlation between the yuan exchange rate and the country’s current account surplus has been the strongest ever, highlighting the importance of China- US trade to a powerful redback, she said.

Cross-border capital outflow in the three months ended Sept. 30 was relatively small compared with the huge inflow of foreign funds into the country’s bond market, all of which is backing the currency. Once the FTSE World Government Bond Index starts to include Chinese government bonds later this month, the country’s bond market will expand even further, and could attract USD10 billion in capital inflows in the fourth quarter, Barclays predicts.

International investors' holdings of Chinese fixed income assets grew faster than expected from January to July, surging 17 percent to USD522 billion.

Although most institutions expect the US Federal Reserve to announce its balance sheet reduction plan in November and start implementing it in December, many also think that the US will not start hiking interest rates in the short run and the yuan-dollar exchange rate is expected to remain between 6.4 and 6.6.

Editor: Kim Taylor