RMB, equities show recovery is on track

USD/CNY spot at 6.7281, SCI at 3227.59;stimulus, COVID steps prove effective

Strong performances on Monday by the Chinese currency renminbi and the A-share market — the benchmark Shanghai Composite Index rose 1.01 percent to close at 3227.59 points — provide further evidence that China's economic recovery is on track, experts said.

The RMB's spot exchange rate against the US dollar opened below 6.7 on Monday and closed at 6.7281.This is the first time in six months that the USD/CNY spot rate breached the 6.7 level. This indicator has gained 3.6 percent since the beginning of this year.

The offshore USD/CNY, which reflects international investors' outlook for the Chinese currency, also touched 6.69 during morning trading. The indicator has also risen more than 3 percent this year.

Xuan Changneng, vice-governor of the People's Bank of China, the country's central bank, said at a news conference on Friday that the renminbi has gradually appreciated against the US dollar since mid-November as the economic stimulus policies have started to take effect.

The introduction of optimized COVID-19 control policies and financial measures to support the property sector, as well as the anticipation of the US Federal Reserve's slowdown in interest rate hikes, have all contributed to the recent rise of the renminbi.

Experts from UBS Global Wealth Management's Chief Investment Office said the market sentiment brightened as China optimized its epidemic control policies earlier than expected. Investors' outlook on China's economic growth has thus improved, which will translate into capital inflows into Chinese risk assets.

Meanwhile, the US employment and wage data have shown sluggish signs. The Fed's interest rate hike cycle may come to an end. The divergent economic growth trajectories of China and the US will be conducive to the renminbi's appreciation, said UBS experts.

That assessment led them to upgrade the three-month USD/CNY forecast to 6.6 on Monday, down from the earlier estimate of 6.9. Their 12-month USD/CNY forecast, which was 6.7, has been also adjusted to 6.5.

Meanwhile, the Shenzhen Component Index jumped 1.58 percent to close at 11785.77 points on Monday while the technology-focused ChiNext in Shenzhen closed 1.86 percent higher.

The northbound capital, the amount that foreign investors pump in to buy A shares via the stock connect program linking the Shanghai, Shenzhen and Hong Kong bourses, reported a net inflow of 15.8 billion yuan ($2.4 billion) on Monday.

The A-share securities brokerages, whose rally is always interpreted as a sign of an overall bull run, reported the strongest average daily increase of 3.18 percent for any sector on Monday, followed by the 2.99 percent average gain made by semiconductor makers.

Market mavens said they believe the A-share market has entered a key stage where investors may want to increase their exposure as odds are high the benchmark indexes will rise further in the Chinese Lunar New Year, which starts on Jan 22 this year.

CITIC Securities' Chief Strategist Qin Peijing said recent economic data are in line with the market expectation of China's fundamentals, boosting investors' confidence and encouraging them to increase their positions. More capital, including foreign capital, will enter the market after the Spring Festival holiday. The A-share market is very likely to continue its bullish performance after the holiday, some traders said.

Analysts from Guotai Junan Securities are optimistic about the A-share market's prospects in the new year as long-term investors, like foreign institutional investors, wealth management firms and insurers, have increased their holdings.

Dai Kang, chief strategist from GF Securities, said the bull run will continue as the supply of capital has remained stable, economic recovery is orderly and in an advanced state, and the renminbi has steadily appreciated.