An ongoing Chinese stock market rally and a yuan exchange rate rebound over the last week have fanned speculation that, as the coronavirus appears to be coming under control, China could become a new safe-haven for investors with other major economies now the ones reeling from the outbreak. China’s equity benchmark, the Shanghai Composite Index, has risen around 10 per cent in the last month despite new data that showed the manufacturing and services sectors activity contracted sharply in February due to the the impact of the coronavirus outbreak. The yuan’s exchange rate has also gained 0.73 per cent against the US dollar, pulling back sharply from the key psychological line of 7.00, and making it the second best performing among 11 major Asian currencies. Michael Metcalfe, global head of macro strategy at State Street Global Market, said that “it is a curious fact that Chinese equities have outperformed global markets, even though Chinese growth, initially at least, seemed certain to take the biggest hit.” Since trading resumed after the Lunar New Year, China’s stock market attracted 850 billion yuan (US$122 billion) of stock purchases from Hong Kong via the Shanghai and Shenzhen Stock Connect channel in February, up from 506 billion yuan in January and 450 billion yuan in December. Outstanding Chinese bonds held by foreigners also rose to 1.95 trillion yuan (US$280 billion) in February, from 1.89 trillion in January, and 1.88 trillion yuan in December. The US dollar and Japanese yen are common safe haven currencies given the size of the countries, their stable political systems as well as their deep trading liquidity, but they have succumbed to selling pressure due to the acceleration in the numbers of their domestic coronavirus infections. Global equity markets, including the S&P 500 Index in the United States, have suffered sharp drops in the last 10 days [before US markets rebounded Wednesday on news of Joe Biden’s strong showing in the Super Tuesday political primaries], while the US dollar index has slid against a basket of its major trading peers to its lowest level in a month. Fears have now migrated over to Europe, and possibly to the US, where they have started to test [for the virus] more aggressively. So the market is pivoting to other safe havens [such as China] Stephen Innes Save haven assets such as government securities, stable stocks, gold, and cash, tend to maintain or increase in value when financial markets are under stress as investors seek to protect their investments from periods of market turmoil, while they tend to see losses when investors are willing to by riskier assets with higher returns. The favour investors have shown Chinese stocks and the yuan could be partly explained by the shift in the focus of the coronavirus, said Stephen Innes, chief market strategist at financial services firm, AxiCorp. “Fears have now migrated over to Europe, and possibly to the US, where they have started to test [for the virus] more aggressively. So the market is pivoting to other safe havens [such as China],” said Innes, although he did concede that “much money remains on the sidelines” because more time is needed to see how the global virus situation develops. China’s measures to restrict transport and lockdown large portions of its population to contain the spread of the epidemic since the Lunar New Year holiday appear to be bearing results, and could lead to a faster economic recovery than in other countries, which are now just starting to see the impact of the outbreak. At least 20 of China’s 31 provincial level jurisdictions, such as economic powerhouses Guangdong and Zhejiang, have lowered their public health emergency responses in the last week, but it is a very different story outside China, w ith major business and commercial events suspended. Although government restrictions on the convertibility of the yuan into other currencies must be loosened for yuan-denominated assets to be seen as a true safe havens, it is nevertheless being more widely used in pricing and settling trade and investment transactions in Asia. For Chinese bonds, traders may continue to treat them as part of emerging markets because of th e expected continued divergence between Chinese bond yields with other countries, with e merging-market economies usually maintaining interest rates higher than US Treasury bond yields to support their currencies. As the People’s Bank of China’s monetary policy easing is expected to be more restrained compared to other major central banks, higher interest rates in China may make mainland bonds an attractive buy and in turn boost the yuan , said Ken Cheung Kin-tai, senior Asian currency strategist at Mizuho Bank. The US Federal Reserve’s emergency half-point rate cut on Tuesday weakened the US dollar and strengthened the yuan, with a ttention now turning to the European Central Bank, the Bank of England and the Bank of Japan after Australia lowered its interest rates to a record low on Tuesday and the Bank of Canada followed suit on Wednesday. China’s 10-year government bonds currently offer a yield of 2.79 per cent, well above 1.03 per cent in the US, 0.1 per cent in Japan, and minus 0.61 per cent in Germany. Chinese bonds may also be given an additional boost from JPMorgan Chase’s decision to add them to its emerging-market indices from last Friday, ApiCorp’s Innes said. That decision will cause an estimated US$20 billion of foreign capital to flow into China’s onshore debt market as passive international investment mangers are forced to track the JPMorgan Chase benchmark as part of their fund requirements. The yuan ended 2019 down 1.4 per cent against the US dollar, although it suffered a roller-coaster ride during the year, with its value changing as much as 7.7 per cent. The flexibility of the yuan exchange rate has continued to increase, and it has played an important role in allocating foreign exchange resources, balancing international balance of payments, and enhancing macroeconomic resilience Lu Lei Lu Lei, deputy director of the State Administration of Foreign Exchange, China’s foreign exchange regulator, appeared comfortable with the yuan’s increasing volatility, arguing that China’s economy remained resilient and its potential remained large with a positive long term trend. “The flexibility of the yuan exchange rate has continued to increase, and it has played an important role in allocating foreign exchange resources, balancing international balance of payments, and enhancing macroeconomic resilience,” Lu wrote in a commentary in the semi-monthly publication, China Finance , on Monday. “Compared with other major currencies, the elasticity of the two-way fluctuation of the yuan is not low, and it is generally at a relatively appropriate level.” OCBC Bank economist Tommy Xie Dongming said that the comments showed Beijing’s confidence in the yuan’s value and the country’s attractiveness for foreign investment despite the virus epidemic. “From the regulator’s perspective, I think they will continue to use the same approach, letting the markets have a bigger say in deciding where the yuan [exchange rate] should be at,” Xie said. “This is the direction of the reforms that have been in discussions for many years. It seems to be moving in that direction, and we are on the way to achieving that target.” Purchase the China AI Report 2020 brought to you by SCMP Research and enjoy a 20% discount (original price US$400). This 60-page all new intelligence report gives you first-hand insights and analysis into the latest industry developments and intelligence about China AI. Get exclusive access to our webinars for continuous learning, and interact with China AI executives in live Q&A. Offer valid until 31 March 2020.