(Yicai) Oct. 19 -- Against the backdrop of a rebounding US Dollar Index and a widening of the negative interest rate spread between China and the United States, the Chinese yuan has strengthened against the US dollar this year, appreciating about 4 percent in the first three quarters to a four-year high. The yuan has also strengthened against the currencies of China’s major trading partners.

Multidimensional data analysis showed that this round of yuan appreciation is not closely related to foreign funds raising their holdings of Chinese assets, but it is instead driven by the domestic market rather than policy regulation.

Since March last year, banks that reflect the main Chinese foreign exchange supply and demand relationship have maintained a continuous surplus in forward forex settlement and sale, including options. Unlike market speculation that the more the yuan appreciates, the more forex settlements companies can conduct, the reality is that firms' motivation to conduct forex settlements is basically stable, while their willingness to purchase foreign currencies has significantly weakened.

In this round of appreciation between May 2025 and August 2026, the average forex receipt and settlement rate on the market was 54.7 percent, only 0.8 percentage points higher than the average during the previous round of yuan appreciation between April 2022 and April 2025. Meanwhile, the average forex payment and purchase rate was 55.4 percent during this round, down 4.8 percentage points from the previous one.

In August, the above rates were 52.8 percent and 47.3 percent, respectively, indicating lower market willingness to settle and sell foreign currencies and weaker motivation to purchase them.

As the yuan exchange rate turns from weak to strong, speculation suggests foreign capital will increase holdings of Chinese assets, but data has not yet supported this. Based on data on foreign receipts and payments made by banks on behalf of their clients, the improvement in domestic forex receipts and payments is mainly due to goods trade, while securities investment remains a drag.

From May 2025 to August 2026, the average monthly net outflow of securities investment was USD17.8 billion, up by USD11.5 billion from the average between April 2022 and April 2025, with net outflows in 10 out of the 16 months. In the same period, the average monthly surplus of foreign receipts and payments made by banks on behalf of their clients increased by CNY35.3 billion (USD5.3 billion) to USD37.7 billion.

The surplus of foreign receipts and payments in the current account increased by USD42.3 billion between May 2025 and August 2026, contributing 120 percent to the increase in the total surplus of foreign receipts and payments.

Meanwhile, the surplus of foreign receipts and payments in goods trade jumped by USD40 billion in the period, contributing 113 percent. The deficit of foreign receipts and payments in capital projects was USD22.3 billion, with a negative contribution of 18 percent, and the deficit of foreign receipts and payments in securities investment expanded, with a negative contribution of 33 percent.

This shows that, from the perspective of a trade surplus in the foreign sector and an oversupply of foreign currencies, conditions are favorable for the yuan. However, from the perspective of strong supply and weak demand in the domestic market, as well as a negative interest rate differential between domestic and foreign markets, it is unfavorable for the yuan.

During the previous round of unilateral pressure on the yuan, a significant amount of net long forex positions accumulated. Now, net long forex positions are being reduced by cutting forex purchases.

From comparable balance-of-payments data, foreign capital’s interest in Chinese stocks is slightly lower than in the previous round of appreciation, but its interest in Chinese bonds is far lower.

From the second quarter of last year to the second quarter of this year, the quarterly average net outflow of foreign securities investment was USD16.5 billion, with a quarterly average net inflow of foreign stock investment of USD17.1 billion and a quarterly average net outflow of foreign securities investment of USD33.6 billion.

From the third quarter of 2020 to the first quarter of 2022, the quarterly average net inflow of foreign securities investment was USD47 billion, with a quarterly average net inflow of foreign stock investment of USD19.7 billion and a quarterly average net inflow of foreign securities investment of USD27.3 billion.

Surprisingly, this round of foreign securities investment is even worse than that in the previous depreciation round. From the second quarter of 2022 to the first quarter of 2025, the quarterly average net inflow of foreign securities investment was USD900 million, with a quarterly average net inflow of foreign stock investment of USD3.9 billion and a quarterly average net outflow of foreign securities investment of USD3 billion.

But China’s foreign direct investment has improved in this round of appreciation. From the second quarter of 2025 to the second quarter of 2026, the quarterly average net inflow of foreign direct investment was USD25.1 billion, up USD9.1 billion from the previous round of depreciation.

The yuan's role as a reserve currency has strengthened again. Global holdings of the yuan as forex reserves totaled USD279.4 billion as of June 30, accounting for 2.11 percent of the total, up USD33.8 billion and 0.15 percentage points, respectively, from Jan. 31 last year, according to the ‌Currency Composition of Official Foreign Exchange Reserves‌ from the International Monetary Fund. Both figures rose quarter-on-quarter for three consecutive quarters.

From a gold and forex reserves perspective, the yuan has benefited from de-dollarization. The share of global gold reserves has risen 3.98 percentage points since the second quarter of last year, according to data from the World Gold Council.

The share of US dollar reserves has dropped 3.56 percentage points since the second quarter of last year, and the shares of the Japanese yen, Canadian dollar, and British pound reserves have fallen between 0.21 and 0.81 percentage points, according to IMF data. Meanwhile, the shares of the euro, Australian dollar, Chinese yuan, Swiss franc, and other currencies that do not disclose currency composition have jumped between 0.02 and 0.34 percentage points in the period.

The author of this article is Guan Tao, chief economist at Huafu Securities.

Editor: Futura Costaglione