Yuan resilient, driven by higher yields and foreign demand

The Chinese yuan held steady against the U.S. dollar supported by a rebound in domestic bond yields since the beginning of the year.

Higher yields could help attract foreign investors to Chinese debt, contributing to more demand for the yuan.

Additionally, foreign holdings of Chinese negotiable certificates of deposits (NCDs) reached 1.07 trillion yuan (USD 148 billion) in January.

This influx of capital could support the yuan and help cushion the impact of trade disputes. Foreign investors find Chinese NCDs attractive due to the attractive yield premium over U.S. Treasuries. The inflows could help stabilize the yuan in the short term although the currency could remain exposed to changing global economic conditions.

Looking ahead, industrial production is expected to slow to 5.4% YoY in February, while retail sales are projected to rise to 4%. Although industrial output may weaken sentiment, an improvement in retail sales could provide support for the yuan. Meanwhile, Beijing’s continuous focus on ramping up consumption should further provide stability to the Chinese currency in the near term.