(Yicai) April 20 -- The Chinese yuan has appreciated over 6 percent against the US dollar in the past year, breaking past the 6.82 mark this month. Dollar-denominated investments, once seen as a ‘sure bet,’ are now leaving many Chinese investors with paper losses.

Li Wei, who works in Shenzhen, converted CNY87,000 into USD12,000 at the beginning of last year when the exchange rate was around 7.27 yuan to the dollar, he told Yicai. Now, with the exchange rate at 6.82, his initial investment is only worth CNY82,000. At that time, the yield on dollar investments was about 3.5 percent, while the yield on yuan products was around 2 percent. However, the 1.5 percentage point interest rate gap is not enough to offset his losses.

Since the US Federal Reserve trimmed interest rates three times last year, the yields on dollar wealth investments in China have been falling. The average annualized return on onshore cash management dollar investment products had slumped to 3.6 percent as of March 31, down from 4 percent or even higher a year earlier, according to financial data platform PY Standard.

The environment that once allowed investors to earn "easy profits" has completely changed, industry analysts said. Fed rate cuts, declining yields on dollar deposits and a stronger yuan have reshaped the market. The redback could still appreciate further and investors should take a more cautious view of dollar-denominated assets, they added.

The yuan’s recent appreciation is the result of multiple internal and external forces acting together, experts said.

One key external driver is the softening US dollar, said Guan Tao, global chief economist at BOC International China. Since Donald Trump's return to the White House last year, global policy uncertainty has increased and the dollar index has tumbled 9.4 percent, marking its worst annual performance since 2018.

Improving domestic fundamentals may be another factor. The current strengthening of the yuan reflects both the weakness of the greenback and China’s better economic data, including strong first-quarter export growth and a rebound in consumption and investment, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

Strong Resilience

Despite ongoing uncertainties in the Middle East and relatively high volatility in the foreign exchange market, the yuan is expected to stay broadly stable supported by export recovery and domestic policies, he added.

Some institutions also note that the yuan has shown strong resilience amid geopolitical conflicts. China’s energy import dependence is relatively low at 27.5 percent, compared with a global average of 55.5 percent, helping reduce vulnerability during the Middle East crisis, according to a recent research report by Shenwan Hongyuan Securities.

Looking ahead, the macro team at Industrial Securities expects yuan appreciation to remain a prevailing trend this year, although the sharpest gains may already be over. The central bank does not wish to encourage one-way appreciation expectations, the team said. With China still facing growth pressures this year and exports remaining an important driver of growth, a significant strengthening of the redback could hurt China's exports.

Editor: Kim Taylor