Guan Tao: Middle East Turmoil Highlights China's FX Market Resilience | Lifang Dajia Talk

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Author: Guan Tao | Columnist, Lifang Dajiati

On April 15, the State Administration of Foreign Exchange (SAFE) released foreign exchange settlement and sales data for March 2026. Based on the latest figures, the specific analysis of the domestic foreign exchange market in March is as follows:

US Dollar Index Strengthens, Non-US Currencies Fall Broadly, RMB Exchange Rate Returns to "Triple Convergence"

In March, influenced by the US-Israel-Iran conflict and heightened Middle East tensions, the US Dollar Index rose 2.3%, marking the largest monthly gain since August 2025. During the same period, the Swiss franc, euro, British pound, and Japanese yen depreciated by 3.8%, 2.2%, 1.9%, and 1.7% against the US dollar, respectively. Meanwhile, the RMB exchange rate demonstrated notable resilience: the central parity rate fluctuated narrowly, rising to 6.9194 at month-end with a cumulative increase of 0.05%, maintaining appreciation for the sixth consecutive month; onshore and offshore spot rates weakened only slightly, depreciating by 0.76% and 0.39% respectively (see Chart 1). The average daily deviation between the onshore spot rate and the central parity rate narrowed from -0.5% in the previous month to -0.1%, while the offshore rate remained generally weaker than the onshore rate, with the average daily deviation shifting from -38 basis points to +27 basis points (see Chart 2).

During the month, the average daily transaction volume of spot inquiry in the interbank market reached USD 50.7 billion, up 14% month-on-month and hitting a record high. This was primarily driven by a significant increase in foreign exchange trading volume following the weakening of the RMB exchange rate at the beginning of the month: from March 2 to 4, the onshore spot rate fell from 6.8559 at the end of the previous month to 6.9120, with spot inquiry volumes reaching USD 60.5 billion, USD 64.5 billion, and USD 71.4 billion respectively—ranking 11th, 4th, and 1st in historical records. Subsequently, as the RMB exchange rate stabilized into a range-bound pattern, foreign exchange trading activity notably contracted, with the average daily volume from March 5 to 31 at USD 48.3 billion, down 26% from the March 2–4 average, indicating overall market expectations had stabilized.

In March, the average onshore spot rate was 6.8958, marking the seventh consecutive month of appreciation. The 3-month lagged环比 average spot rate appreciated for the 13th consecutive month, and the 5-month lagged环比 average spot rate appreciated for the 11th consecutive month, with increases of 2.1% and 3.3% respectively—the latter reaching the highest level since May 2023, reflecting an intensifying financial tightening effect of RMB appreciation on export enterprises (see Chart 3).

In March, due to the RMB exchange rate outperforming other major non-US currencies, the RMB exchange rate index continued its upward trend from the previous month, with a notably accelerated pace of appreciation. The CFETS RMB exchange rate index, the BIS currency basket-based RMB index, and the SDR currency basket-based RMB index rose by 2.3%, 2.4%, and 1.2% respectively, with the first two recording the highest monthly gains since October 2023. During the same period, the nominal and real effective exchange rate indices of the RMB published by the Bank for International Settlements (BIS) appreciated for the eighth and ninth consecutive months, respectively. The nominal effective exchange rate index rose 2.2% month-on-month to 111.0, the highest since November 2022, while the real effective exchange rate index increased 1.2% to 91.5, the highest since March 2025, rebounding 6.2% from its low in June 2025. This narrowed the cumulative decline in the RMB real effective exchange rate since April 2022 from a peak of 18.9% to 14.7% (see Chart 4).

Cross-Border Capital Flows Turn to Net Outflow, Mainly Due to Foreign Investors Reducing RMB Assets and Accelerated Growth in Goods Import, While RMB Cross-Border Receipts and Payments Share Hits Record High

In March, bank-mediated cross-border receipts and payments for customers shifted from a surplus for five consecutive months to a deficit of USD 32.1 billion. By currency, foreign currency cross-border receipts and payments surplus narrowed for the third consecutive month, dropping from a near-record high of USD 60.2 billion in the previous month to USD 10.7 billion, the lowest since August 2024; RMB cross-border receipts and payments recorded a deficit for the third consecutive month, expanding from USD 24.6 billion to USD 42.8 billion, the fifth highest in history. Foreign currency and RMB contributed 73% and 27%, respectively, to the decline in the overall bank-mediated cross-border receipts and payments balance (see Chart 5).

By category, the deficit in securities investment-related cross-border receipts and payments widened from USD 11.0 billion to USD 53.2 billion, the second highest on record, while the surplus in goods trade-related cross-border receipts and payments narrowed for the third consecutive month, from USD 67.8 billion to USD 50.7 billion, the lowest since July 2024 (see Chart 6). These two categories contributed 62% and 25%, respectively, to the decline in the overall balance. Deficits in income and current transfers, direct investment, and services trade-related receipts and payments remained relatively stable, increasing by USD 5.8 billion, USD 1.6 billion, and USD 1.4 billion month-on-month, respectively.

The expansion of the securities investment-related cross-border receipts and payments deficit in March was mainly due to accelerated growth in cross-border outflows. Under securities investment, cross-border receipts and payments increased by USD 101.0 billion and USD 143.2 billion month-on-month to USD 329.3 billion and USD 382.5 billion, respectively, with both growth rates and absolute levels hitting record highs, reflecting significantly increased activity in cross-border securities investment.

During the month, foreign institutions' holdings of domestic RMB bonds declined for the eleventh consecutive month, with the reduction exceeding RMB 10 billion again, expanding from RMB 30.3 billion in the previous month to RMB 134.2 billion. Book-entry government bonds were the primary contributor, with foreign institutions' holdings shifting from an increase of RMB 19.2 billion to a decrease of RMB 52.6 billion, the largest decline since August 2025 (see Chart 7). Meanwhile, amid heightened global risk aversion, emerging market equity assets experienced large-scale foreign sell-offs. Data from the Institute of International Finance (IIF) showed that foreign investors withdrew USD 70.3 billion from emerging market assets, the largest monthly outflow since the market crash triggered by the COVID-19 pandemic in March 2020, marking a sharp reversal from the inflows in the previous two months. Of this, USD 56.0 billion flowed out of emerging market equities (particularly Asian equities), the largest withdrawal in at least 20 years and the main source of the outflow; Chinese equities shifted from a net inflow of USD 5.2 billion in the previous month to a net outflow of USD 2.6 billion, marking the first net outflow in three months (see Chart 8).

In March, the surplus in goods trade-related cross-border receipts and payments narrowed month-on-month, primarily due to unexpectedly strong growth in goods imports. During the month, goods exports increased 7.1% month-on-month to USD 321.0 billion, while imports surged 29.1% to USD 269.9 billion, a record high. Classified by the Harmonized System (HS), imports of "electromechanical and audio-visual equipment" (HS Category XVI) rose 39% month-on-month to USD 97.1 billion, with imports from South Korea accounting for 18.9%, both reaching record highs, reflecting the impact of improving global tech sector sentiment. Against the backdrop of declining precious metal prices, imports of "jewelry and precious metals" (HS Category XIV) rose to USD 29.8 billion, setting a new record, possibly indicating continued strong domestic investment demand for precious metals.

During the month, RMB settlement for goods trade increased 51.4% month-on-month to USD 211.5 billion, accounting for 35.8% of total goods trade volume, a record high (see Chart 9). This may be related to increased demand for RMB settlement in the import segment. As a result, combined with accelerated cross-border capital outflows under securities investment, bank-mediated RMB cross-border payments surged, increasing by RMB 170.5 billion month-on-month to RMB 494.8 billion, a record high (see Chart 10). During the same period, the share of RMB in bank-mediated cross-border receipts and payments rose to 56.4%, while the US dollar share fell to 39.8%, dropping below 40% for the first time.

Domestic FX Supply-Demand Gap Continues to Narrow, Mainly Due to Increased FX Purchasing Demand in Goods Trade and Securities Investment, but Market Participants' Motivation for Spot FX Purchasing Remains Stable, FX Risk Reversal Policy Shows Immediate Effect

In March, the bank spot and forward (including options) FX settlement and sales (hereinafter referred to as bank FX settlement and sales), which reflects the main domestic FX supply-demand relationship, recorded a surplus for the 13th consecutive month, but the surplus narrowed for the third consecutive month, decreasing 66% month-on-month to USD 21.6 billion. Among this, bank-mediated customer FX settlement and sales surplus fell from USD 55.2 billion to USD 35.5 billion; net forward and options FX settlement decreased from USD 19.9 billion to USD 5.6 billion; and banks' own FX settlement and sales deficit expanded from USD 12.4 billion to USD 19.5 billion (banks' own FX sales reached USD 29.0 billion, the fourth highest in history). These three components contributed 48%, 35%, and 17%, respectively, to the month-on-month decline in the overall bank FX settlement and sales surplus (see Chart 11).

The narrowing of the bank-mediated customer FX settlement and sales surplus in March was due to an increase of USD 84.2 billion in customer FX sales, exceeding the RMB 64.4 billion increase in FX purchases. By category, FX sales under goods trade increased by USD 50.1 billion to USD 141.9 billion, the seventh highest in history, while FX sales under securities investment rose by USD 19.8 billion to USD 40.0 billion, a record high (see Chart 12). The increased FX purchasing demand in goods trade and securities investment may reflect the impacts of accelerated goods import growth and foreign investors reducing RMB assets, respectively. However, the FX purchasing rate for payments, excluding forward delivery amounts, remained stable at around 55.0% for the third consecutive month, while the FX settlement rate for receipts rose 1.8 percentage points from the previous month to 58.2% (see Chart 13).

In March, the cumulative outstanding amount of bank-mediated customer forward net FX settlement decreased by USD 0.14 billion month-on-month, ending an eight-month upward trend (see Chart 11). This was mainly due to the central bank lowering the FX risk reserve ratio for forward FX sales starting in early March, leading to a significant increase in forward FX purchasing demand[1]. During the month, forward FX sales contracts increased from USD 6.7 billion to USD 35.2 billion, and the forward FX sales hedging ratio rose 7.0 percentage points month-on-month to 9.8%, both reaching the highest levels since October 2022 (i.e., the month after the central bank raised the reserve ratio[2]). Meanwhile, forward FX purchase contracts increased by USD 14.7 billion month-on-month, and the forward FX purchase hedging ratio rose only 1.5 percentage points to 14.3% (see Charts 14 and 15).

Special Topic: What Constitutes a Safe-Haven Asset?

Following the outbreak of the US-Israel-Iran conflict at the end of February, global risk aversion significantly increased, but traditional safe-haven assets such as gold and the US dollar showed divergent performances. What exactly defines a "safe-haven asset"? What differences have been observed in the performance of traditional safe-haven assets during periods of market turmoil historically? How should we interpret the divergent behavior of safe-haven assets during this conflict? This special topic aims to analyze these questions.

Whenever markets experience turbulence, discussions about "safe-haven assets" intensify among market institutions, but there is often confusion between the concepts of "safe-haven assets" and "safe assets." Although they overlap to some extent, they are not identical: the former typically refers to assets that preserve or even increase in value during periods of market stress, while the latter refers to assets with stable nominal returns, high liquidity, and extremely low credit risk. For example, the saying "buy gold in times of chaos" reflects the market's general perception of gold as a safe-haven asset, but its high price volatility means gold is not a safe asset. In addition to gold, the US dollar, Japanese yen, Swiss franc, and US Treasuries are also widely regarded as having safe-haven attributes. However, historical experience shows that the safe-haven effectiveness of different assets varies significantly across different periods and contexts.

Cheema et al. (2025) identified 13 stock market downturn events between 1987 and 2023, defined as periods when the MSCI World Index declined by more than 10% from peak to trough, and included the Asian financial crisis-related market decline (during which the MSCI World Index fell by a maximum of 9.60%, but the MSCI Emerging Markets Index fell by 30%). Based on this, Cheema et al. (2025) examined the safe-haven characteristics of 11 potential safe-haven assets relative to seven different equity indices, including the MSCI World Index, Emerging Markets Index, US equities, A-shares, and Japanese equities[3]. For comparative analysis, we categorized the safe-haven effectiveness of major assets relative to the MSCI World Index based on regression results (see Chart 16), leading to the following four conclusions:

First, the safe-haven effectiveness of an asset depends on the nature of the shock. During stock market downturns caused by macroeconomic or financial market factors, government bonds—especially US Treasuries—typically exhibit strong safe-haven characteristics. This is because such events are usually accompanied by economic slowdown, declining inflation, and rising unemployment, leading to lower US interest rates and thus higher bond prices. However, during stock market downturns triggered by geopolitical events (whether involving the US or not), the safe-haven attributes of government bonds are significantly weakened; for example, US Treasuries did not exhibit safe-haven characteristics during three such downturns, mainly reflecting the impact of increased debt issuance and heightened inflation concerns.

Second, the safe-haven effectiveness of an asset depends on the degree of a country's involvement in the shock. In geopolitical conflicts, assets from countries directly involved in or closely related to the crisis are unlikely to serve as safe havens. For instance, the US dollar did not act as a strong safe-haven asset during the Gulf War or the "9/11" attacks, but it did during the Russia-Ukraine conflict.

Third, the Japanese yen has maintained relatively stable safe-haven effectiveness. During all 13 stock market downturns, the yen exhibited safe-haven currency attributes, with overall effectiveness stronger than that of the Swiss franc. This is mainly attributed to two factors: first, during most of the sample period, Japanese interest rates were near the zero lower bound, and global monetary policy typically eased during market downturns, causing the positive interest rate differential between Japan and other countries to narrow, which supports the yen; second, none of the market downturn events originated in Japan, making it a relatively safe investment destination.

Fourth, the safe-haven effectiveness of gold and the US dollar has shown significant variation. During stock market downturns caused by macroeconomic or financial market factors, gold and the US dollar typically act as safe-haven assets, with the latter possibly reflecting increased demand for US Treasuries. During the three stock market downturns triggered by geopolitical conflicts, the safe-haven attributes of gold and the US dollar exhibited an inverse relationship; for example, during the 2022 Russia-Ukraine conflict, gold did not exhibit safe-haven characteristics, while the US dollar served as a strong safe-haven asset.

The US-Israel-Iran conflict that erupted at the end of February this year had a significant impact on global financial markets. However, unlike during the Gulf War, "9/11," and the Russia-Ukraine conflict, the US dollar was the only asset to exhibit safe-haven attributes during this geopolitical crisis, while other traditional safe-haven assets generally underperformed. In March, the 10-year US Treasury yield rose by 33.0 basis points, continuing the pattern observed in the previous three geopolitical conflicts and lacking safe-haven characteristics; London spot gold prices fell 11.8%, continuing the non-safe-haven pattern seen during the Russia-Ukraine conflict; even the historically most stable safe-haven assets, the Japanese yen and Japanese government bonds, came under pressure, with the yen depreciating 1.7% against the US dollar and the 10-year Japanese government bond yield rising 24.3 basis points (see Chart 17). This was mainly due to a sharp rise in energy prices, which dampened expectations of