Guan Tao: Disturbances in the Middle East demonstrate the resilience of China's foreign exchange market.

Abstract In March, affected by the US-Iran conflict and the turmoil in the Middle East, the US dollar index strengthened, while non-US currencies fell across the board. However, the renminbi exchange rate remained stable, with the onshore and offshore spot exchange rates only slightly weakening. The renminbi exchange rate index showed a faster upward trend. In March, cross-border capital flows turned from net inflows to net outflows after five consecutive months, mainly due to foreign investors reducing their holdings of renminbi assets and an acceleration in import growth. Driven by trade in goods and securities investment, renminbi outflows surged, and the proportion of renminbi receipts and payments reached a record high. In March, the gap between domestic and foreign exchange supply and demand continued to narrow, mainly due to increased demand for foreign exchange purchases for trade in goods and securities investments. However, the motivation for immediate foreign exchange purchases in the market remained stable, and the willingness to exchange foreign currencies for renminbi strengthened. The foreign exchange risk reserve policy that took effect at the beginning of the month had an immediate impact, leading to a significant increase in demand for forward foreign exchange purchases. Topic: Who are safe-haven assets? Firstly, it is necessary to differentiate between safe-haven assets and secure assets, as they overlap but are not the same. Secondly, the effectiveness of asset havens during periods of market turmoil depends on factors such as the nature of the shock and the extent of involvement in the shock by the home country. In previous shocks, the safe-haven effectiveness of the Japanese yen remained stable, while the safe-haven effectiveness of gold and the US dollar varied greatly. After the outbreak of the US-Iran conflict at the end of February, the US dollar became the only asset to exhibit safe-haven properties, reflecting expectations of a retreat from monetary easing and the impact of liquidity shocks. Finally, the safe-haven properties of Chinese bonds need to be rationally assessed. Text On April 15, the State Administration of Foreign Exchange released the foreign exchange data for March 2026. Based on the latest data, the specific analysis of the operation of the domestic foreign exchange market in March is as follows: The US dollar index strengthened, and non-US currencies fell across the board, while the renminbi exchange rate returned to a narrow range. In March, the US dollar index rose by 2.3% due to the US-Iran conflict and turmoil in the Middle East, reaching a new high since August 2025. The Swiss franc, euro, pound, and yen all fell against the US dollar by 3.8%, 2.2%, 1.9%, and 1.7% respectively. During the same period, the renminbi exchange rate showed strong resilience: the central parity rate remained stable, rising to 6.9194 by the end of the month, an increase of 0.05% from the previous month, marking the sixth consecutive month of appreciation. The onshore and offshore spot exchange rates only slightly weakened, with cumulative depreciations of 0.76% and 0.39% respectively. The average deviation of the onshore spot exchange rate from the central parity rate narrowed from -0.5% last month to -0.1%, while the offshore spot exchange rate remained relatively weak, with an average deviation of +27 basis points from the onshore spot exchange rate (see Chart 2). The daily average turnover of onshore spot exchange rates in the interbank market was $50.7 billion in March, an increase of 14% from the previous month, reaching a historical high. This was mainly due to the increase in foreign exchange transactions caused by the depreciation of the renminbi exchange rate at the beginning of the month: from March 2 to 4, the onshore spot exchange rate fell from 6.8559 at the end of the previous month to 6.9120. During this period, the volumes of spot transactions were $60.5 billion, $64.5 billion, and $71.4 billion, ranking eleventh, fourth, and first in history. Subsequently, as the renminbi exchange rate stabilized, foreign exchange transactions converged significantly, with an average daily turnover of $48.3 billion from March 5 to 31, down 26% from the average value from March 2 to 4, indicating that market expectations were stabilizing overall. In March, the average value of the onshore spot exchange rate was 6.8958, marking the seventh consecutive month of appreciation, with a lagged increase of 2.1% over the past three months and the thirteenth consecutive month of appreciation. The lagged increase in the average value of the spot exchange rate, based on a five-month comparison, marks the eleventh consecutive month of appreciation, with an increase of 3.3%. The latter set a new high since May 2023, indicating an intensification of the financial squeeze on export enterprises due to renminbi appreciation (see Chart 3). In March, due to the renminbi exchange rate showing clear strength compared to other major non-US currencies, the renminbi exchange rate index continued its upward trend from the previous month, with a significant increase in the appreciation rate. The CFETS renminbi exchange rate index, the BIS reference, and the SDR currency basket renminbi exchange rate index increased by 2.3%, 2.4%, and 1.2% respectively, with the first two setting monthly highs since October 2023. The BIS published renminbi nominal and real effective exchange rate indices, which marked the eighth and ninth consecutive months of appreciation, with the nominal effective exchange rate index rising by 2.2% to 111.0, a new high since November 2022, and the real effective exchange rate index rising by 1.2% to 91.5, a new high since March 2025 and rebounding by 6.2% from the low point in June 2025. The cumulative decline in the renminbi real effective exchange rate since April 2022 has narrowed from a maximum of 18.9% to 14.7% (see Chart 4). Cross-border capital turned into net outflows, mainly due to foreign investors reducing their holdings of renminbi assets and a faster increase in import growth, leading to a record high proportion of renminbi receipts and payments. In March, the balance of bank customers' cross-border receipts and payments turned from a surplus to a deficit of $32.1 billion after five consecutive months. In terms of currencies, the surplus of foreign currency cross-border receipts and payments shrank for the third consecutive month, falling from a historical high of $60.2 billion the previous month to $10.7 billion, the lowest since August 2024. The renminbi cross-border receipts and payments recorded a third consecutive month of deficit, with the amount rising from $24.6 billion the previous month to $42.8 billion, the fifth highest on record. Foreign currencies and renminbi accounted for 73% and 27%, respectively, of the decrease in the balance of bank customers' cross-border receipts and payments (see Chart 5). By project, the deficit in securities investment cross-border receipts and payments increased from $11 billion the previous month to $53.2 billion, the second-highest on record, while the surplus in goods trade cross-border receipts and payments decreased for the third consecutive month from $67.8 billion to $50.7 billion, the lowest since July 2024 (see Chart 6). Both contributed to a 62% and 25% decrease in the balance of bank customers' cross-border receipts and payments, respectively; the deficits in revenue and outward direct investment and the stability of forward foreign exchange demand remained relatively stable, increasing by $5.8 billion, $1.6 billion, and $1.4 billion, respectively, compared to the previous month. In March, the deficit in securities investment cross-border receipts and payments widened, mainly due to the faster growth in external spending. Under securities investment, the sizes of inbound and outbound transactions increased by $101 billion and $143.2 billion, respectively, to $329.3 billion and $382.5 billion, reaching record highs in both absolute levels and month-over-month growth rates, reflecting an increase in cross-border securities investment activity. During the same month, the amount of renminbi bonds held by foreign institutions in the domestic market decreased for the eleventh consecutive month, with the decrease exceeding one hundred million for the first time. The main contributor was the decrease in book-entry government bonds, with foreign institutions reducing their holdings by $19.2 billion, the largest decrease since August 2025 (see Chart 7). Amid a backdrop of heightened global risk aversion, emerging market stock assets suffered large-scale sell-offs by foreign investors. Data from the Institute of International Finance (IIF) shows that foreign investors withdrew $70.3 billion from emerging market assets, the largest monthly outflow since the market crash caused by the COVID-19 pandemic in March 2020, marking a sharp contrast with the inflow trends of the previous two months. Among them, emerging market stocks (especially Asian stocks) saw outflows of $56.0 billion, the largest outflow in at least 20 years and the primary source of the outflow; China's stock assets turned from a net inflow of $5.2 billion the previous month to a net outflow of $2.6 billion, marking a return to net outflows after three months (see Chart 8). In March, the surplus from goods trade cross-border receipts and payments narrowed, mainly due to the unexpectedly rapid growth in goods imports. During the month, the value of goods exports increased by 7.1% to $321.0 billion, while imports increased by 29.1% to $269.9 billion, reaching historical highs. According to the Harmonized System (HS) classification standards based on product names and codes, the import value of "electrical and audiovisual equipment" (HS category 16) increased by 39% to $97.1 billion, with imports from South Korea accounting for 18.9%, both reaching historical highs. This trend reflects the global rebound in the technology industry; as precious metal prices fell, the import value of "jewelry and precious metals" (HS category 14) increased to $29.8 billion, setting a new record, indicating strong domestic demand for precious metal investments. During the month, the total settlement amount of renminbi-denominated trade in goods increased by 51.4% to $211.5 billion, accounting for 35.8% of the total trade volume, reaching a record high (see Chart 9). This increase may be related to the growing demand for renminbi settlements in the goods import process. As a result, combined with the acceleration of cross-border outflows under securities investment, the size of bank customers' renminbi-denominated external spending surged to $494.8 billion in March, up $170.5 billion from the previous month, setting a historical record (see Chart 10). During the same period, the renminbi share of bank customers' cross-border receipts and payments rose to 56.4%, while the US dollar share fell below 40% for the first time to 39.8%. The gap between domestic and foreign exchange supply and demand continued to narrow in March, mainly due to the increased demand for foreign exchange purchases for goods trade and securities investments. However, the motivation for immediate foreign exchange purchases in the market remained stable, and the willingness to exchange foreign currencies for renminbi strengthened. The foreign exchange risk reserve policy that took effect at the beginning of the month had an immediate impact, leading to a significant increase in demand for forward foreign exchange purchases. In March, bank customers' cross-border forward (including options) settlements continued to show a surplus for the thirteenth consecutive month, but the surplus decreased for the third consecutive month, falling by 66% to $21.6 billion. The surplus from bank customers' forward settlements decreased from $55.2 billion to $35.5 billion, while the net settlement amount from forward and options decreased from $19.9 billion to $5.6 billion. The deficit in the banks' own forward settlements increased from $12.4 billion to $19.5 billion (with sales reaching $29.0 billion, the fourth-highest on record), contributing to a 48%, 35%, and 17% decrease in the surplus from bank customers' forward settlements (see Chart 11). In March, the surplus in bank customers' forward settlements decreased due to an increase in the amount of sales by bank customers, which exceeded the increase in settlements. In terms of projects, the amount of sales under goods trade increased by $5.01 billion to $14.2 billion, ranking seventh historically, while the amount of sales under securities investments increased by $1.98 billion to $4.0 billion, setting a new historical high (see Chart 12). The increased demand for purchases under goods trade and securities investments may respectively reflect the accelerated growth in imports and the impact of foreign investors reducing their holdings of renminbi assets. However, the average forwarding rate of outbound payments excluding forward delivery amounts and forwards has remained stable at around 55.0% for the third consecutive month, while the reception rate has increased by 1.8 percentage points from the previous month to 58.2% (see Chart 13). In March, the cumulative underfunded amount of bank customers' forward settlements fell by $1.4 billion, ending an eight-month trend of increases (see Chart 11). This was mainly due to the People's Bank of China reducing the foreign exchange risk reserve ratio for forward sales business since the beginning of March, resulting in a significant increase in demand for forward purchases[1]. During the month, the amount of forward purchase contracts increased from $6.7 billion to $35.2 billion, and the forward hedging ratio increased by 7.0 percentage points to 9.8%, both setting new highs since October 2022 (i.e., the month after the central bank raised reserves[2]). Meanwhile, the amount of forward settlement contracts increased by $14.7 billion, while the forward settlement hedging ratio increased by only 1.5 percentage points to 14.3% compared to the previous month (see Chart 14, 15). Topic: Who are safe-haven assets? After the US-Iran conflict broke out at the end of February, global risk aversion significantly increased, but traditional safe-haven assets such as gold and the US dollar showed mixed performance. What exactly are "safe-haven assets"? Historically, how do traditional safe-haven assets differ in performance during periods of market turmoil? How can we understand the divergent performance of safe-haven assets in this conflict? This topic seeks to analyze these questions. During times of market turmoil, discussions on "safe-haven assets" increase among market institutions, often resulting in confusion between the concepts of "safe-haven assets" and "secure assets." Although they overlap, safe-haven assets are typically seen as assets that can preserve or increase value during market turmoil, while secure assets refer to assets with stable nominal returns, high liquidity, and minimal credit risk. Take gold, for example"buy gold in troubled times" suggests that gold is widely regarded as a safe-haven asset, but its high price volatility means that it is not a secure asset. Apart from gold, the US dollar, the Japanese yen, the Swiss franc, and US bonds are also widely recognized as safe-haven assets. However, historical experience shows that different assets exhibit significant differences in safe-haven effectiveness during the same period and the same asset during different periods. Cheema et al. (2025) used the MSCI Global Market Index from 1987 to 2023, with a peak-to-trough decline of over 10% as the standard, and included stock market declines related to the Asia Financial Crisis (where the MSCI Global Index fell by 9.6%, but the MSCI Emerging Markets Index fell by 30%), identifying thirteen stock market decline events. Based on this, Cheema et al. (2025) examined the safe-haven characteristics of eleven potential safe-haven assets relative to seven different stock indices, including the MSCI Global Index, the Emerging Market Index, US stocks, A shares, and Japanese stocks[3]. For ease of comparison, we categorized the main assets in terms of their safe-haven effectiveness relative to the MSCI Global Index (see Chart 16) and derived the following four conclusions: Firstly, asset safe-haven effectiveness depends on the nature of the shock. Government bonds are effective safe-haven assets during periods of stock market declines caused by macroeconomic or financial market shocks, particularly US Treasury bonds, which usually exhibit strong safe-haven characteristics. This is because macroeconomic or financial market events typically lead to economic slowdown, falling inflation, and rising unemployment rates, resulting in lower US interest rates and higher bond prices. However, during stock market declines caused by geopolitical events (regardless of US involvement), the safe-haven characteristics of government bonds are significantly weakened. For example, US bonds did not exhibit safe-haven properties during three stock market declines, reflecting the impact of increased debt issuance and heightened inflation. Secondly, the safe-haven effectiveness of assets depends on the extent of the home country's involvement in the shock. In geopolitical conflicts, assets from countries directly involved in the crisis or closely related to it are unlikely to act as safe havens. For example, the US dollar did not serve as a strong safe-haven asset during the Gulf War and the "9.11" event, while it played a strong safe-haven role in the US-Ukraine conflict. Thirdly, the safe-haven effectiveness of the Japanese yen has remained stable. The yen has shown a safe-haven currency property in all thirteen stock market decline events, demonstrating overall strength compared to the Swiss franc. This is mainly due to two reasons: for much of the sample period, Japanese interest rates were near the zero lower bound, and during periods of global monetary policy easing during stock market declines, the positive interest rate differential between Japan and other countries usually narrows, leading to yen appreciation. Secondly, the events of stock market declines were typically not initiated in Japan, making Japan a relatively safe investment destination. Fourthly, the safe-haven effectiveness of gold and the US dollar varies greatly. During periods of stock market declines caused by macroeconomic or financial market shocks, gold and the US dollar typically act as safe-haven assets, with the latter potentially reflecting increased demand for US Treasury purchases. During three stock market declines caused by geopolitical conflicts, the safe-haven properties of gold and the US dollar fluctuated, with the US dollar serving as a strong safe-haven asset in the US-Ukraine conflict. In contrast to previous geopolitical crises, the US dollar emerged as the only asset in this conflict to exhibit safe-haven properties, with other traditional safe-haven assets experiencing setbacks. In March, the 10-year US Treasury yield rose by 33.0 basis points, continuing the trend seen in the three previous geopolitical conflicts, where it exhibited no safe-haven properties; the spot gold price in London fell by 11.8%, a continuation of its lack of safe-haven characteristics seen in the US-Ukraine conflict; even the historically stable safe-haven assets like the Japanese yen and Japanese government bonds faced pressure, with the yen depreciating against the US dollar by 1.7% and the 10-year Japanese government bond yield rising by 24.3 basis points (see Chart 17). This was mainly due to the sharp rise in energy