Since October 2018, emerging markets have once again gained favor from international capital.
In this context, the MSCI expansion of A shares and the inclusion of A shares into the FTSE Em
erging Markets Index will likely happen in 2019, with foreign investment attracted by such major international o
pportunities. Latest data showed that in the fourth quarter of 2018, net inflow of direct investment by overseas financial ins
titutions soared to $2.14 billion, marking the highest level since the third quarter of 2015. Thanks to the overseas investment inflow, China’s capital ou
tflow pressure is expected to continue to be eased in 2019, thus reducing the restraint on its monetary policy.
Third, the yuan’s exchange rate continued to return to its normal valuation. In the long
run, the yuan’s rate reflects changes in China’s economic fundamentals, with two-way fluctuations surrounding its eq
uilibrium exchange rate. In the third quarter of 2018, the effective exchange rate of the yuan was greatly lower than the equilibrium rate. I
n the fourth quarter, the yuan’s rate rebounded slightly, indicating the effective exchange rate had started to r
eturn to its equilibrium level. Due to the still existing gap between the effective rate and equilibrium rate, there is room
for the yuan’s rate to return to its valuation, conducive to further buffering of the external exchange rate risk.