SHANGHAI- China's yuan jumped to a near four-year high against the dollar on Wednesday, amid signs the escalating Russia-Ukraine crisis is boosting foreign demand for Chinese assets.
Further yuan strength, which hurts Chinese exports, could invite intervention by the People's Bank of China, but analysts say a potential broadening of western sanctions against Russia could push Moscow to increase yuan holdings over the long run.
The yuan CNY=CFXS was calm in morning trading, but climbed against the greenback in the afternoon, finishing the domestic session at 6.3178 per dollar, the highest closing level since April, 2018. Offshore yuan CNH=D3 also rose to a near four-year high.
Western nations and Japan on Tuesday punished Russia with new sanctions for ordering troops into separatist regions of eastern Ukraine and threatened to go further if Moscow launched an all-out invasion of its neighbor.
"Foreign investors have been buying Chinese sovereign bonds for long," said a trader at a foreign bank, who declined to be identified.
"And the more chaotic the (geopolitical) situation, the stronger the yuan becomes."
Reflecting rapidly rising foreign demand, offshore yuan, which had been trading weaker than its onshore counterparts in nearly all sessions in January, become stronger over the past week. Premium hit a near four-month high on Tuesday.
Investment bank China International Capital Corp (CICC) wrote in a note that over the long term, Russia could increase yuan holdings due to western sanction.
Chinese yuan accounted for 13.1% of Russia's foreign reserves in 2021, compared with 0.1% in 2017. U.S. dollar holdings fell to 16.4% from 46.3% as Russia's central bank diversifies away from the greenback.
Last June, Russia said it would ditch U.S. dollar assets in its National Wealth Fund (NWF) and increase holdings in euros, Chinese yuan and gold.
Western sanctions "could push Russia towards an alternative currency bloc like the RMB," potentially benefiting Chinese government bonds, said Howe Chung Wan, head of Asian Fixed Income at Principal Global Investors.
However, China's central bank will be unlikely to let the yuan appreciate too much given the weakness in the domestic economy, he cautioned, identifying 6.3 per dollar as a near-term floor for the yuan.
(Reporting by Shanghai Newsroom; Editing by Krishna Chandra Eluri) ((firstname.lastname@example.org; +86 21 20830018; Reuters Messaging: email@example.com))