China Stock and Yuan Rally Spurs Hopes of Virtuous Feedback Loop
A surge in Chinese equities is stoking bullish sentiment toward the yuan, raising prospects of a virtuous cycle where gains in one asset class reinforce confidence in the other.
The iShares MSCI China ETF , a proxy for foreigners’ appetite for Chinese shares, saw $395 million of net inflows in August, the most since May, according to Bloomberg-compiled data. Strategists at BNY and others have also turned more constructive on the yuan, citing equity strength that could shore up the currency in the near-term. Demand for the yuan would rise if overseas investors convert foreign currencies into renminbi to purchase mainland stocks.
The mainland stock benchmark CSI 300 has climbed over 10% last month to outpace most global benchmarks, while the yuan has risen about 1% against the dollar. The twin rally may reflect an inflection point in China, where recent policy recalibration — such as “anti-involution” efforts to tackle industrial overcapacity — is aligning with optimism over AI-driven technology breakthroughs, even as broader economic indicators remain subdued.
“I do think again that people are going to be watching the whole investment cycle in China,” said Claudio Piron , co-head of Asia rates and currencies strategy at BofA Securities. “There is potentially a good story.”
While real-time data on foreign inflows remain patchy, signs of renewed interest are emerging. China International Capital Corp.’s analyst Liuyang Li , citing data from UK research firm EPFR, estimates that foreign capital inflows into mainland Chinese stocks had increased “significantly” as of late August. Strategists at and HSBC Global Investment Research have also flagged a pick-up in foreign buying.
Domestic hedge funds appear to be for now, with broader investor sentiment triggering a in the stock market. But expectations of a gradually appreciating yuan could attract further overseas capital and help stem outflows.
Further allocation into Chinese stocks may propel the dollar to weaken further against the yuan, said Wee Khoon Chong , senior strategist for BNY, who revised yuan bias to positive from neutral. “Fresh equity buying should drive more demand for CNY and therefore would be positive for CNY.”
Beijing’s push to stabilize markets — by encouraging state-owned insurers to boost A-share exposure and nudging the yuan higher — marks a shift from its earlier 2025 focus on currency stability amid trade tensions.
Despite a stock rally, some analysts are still cautious, citing weak macro indicators and liquidity-driven gains rather than solid fundamentals. Global risks including the Federal Reserve’s interest-rate path, tariffs, and geopolitics remain swing factors, said Charu Chanana , chief investment strategist at Saxo Markets.
Still, “if liquidity and targeted stimulus remain in place, you could indeed see this ‘virtuous’ cycle between equities and the currency,” she said.
