How Will a Weaker China Yuan Affect China A-Shares and Domestic Economy? Here’s the Answer

On May 17 and May 18, the offshore and onshore yuan (CNY), which have continued to decline for several months, broke through the 7.0 integer mark. As of May 20, the onshore yuan closed at 7.014, and the offshore yuan closed at 7.0216.  What impact will it have on the domestic economy in the process of recovery? Meanwhile, investors are particularly concerned about the impact of exchange rate fluctuations on A-shares.

Li Liuyang, Managing Director of Research Institute and head of foreign exchange research with CICC, said that the depreciation of the yuan exchange rate was more affected by external factors. The US dollar index rebounded from a low of 101 to close to 104 from May 8 to 18. During this period, it can be seen that most currencies have experienced a certain correction against the US dollar.

The impact of exchange rate fluctuations on the capital market would be limited. Li Liuyang believes that the pricing mechanism of the capital market such as stocks and bonds does not completely coincide with the pricing mechanism of the exchange rate. Both are affected by the recovery of the domestic economy. The factors affecting exchange rate changes are more diverse and mostly overseas factors. In addition, most of the time trends of the two do not coincide. "China is still an economy with relatively good prospects in 2023." The gradual easing of overseas monetary policies will narrow the interest rate gap between China and foreign countries. These factors will eventually attract the inflows of cross-border securities investment funds.

Pan Hongsheng, chief economist of China Securities Finance Research Institute, also believes that the domestic economy is the main factor affecting A-shares.  Since the beginning of this year, in the process of valuation restoration of A-shares, innovative sectors such as artificial intelligence and communications have continued to outperform. With the strengthening of innovation-driven capabilities of domestic enterprises, the capital market has out more emphasis on the steady improvement of the value of enterprises themselves.

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