In the past week, the A-share market has been red-hot. On May 25, the Shanghai Composite Index surged by 2.4%, marking the largest single-day increase in the past seven months, followed by a strong rise above the 3,600-point level over the next three trading days.
  $CSI 300 Index (000300.SH)$The index was also strong, with a weekly gain of 3.64%, having rebounded significantly from the post-Chinese New Year adjustment, approaching historical highs last seen during the major bull markets of 2007 and 2015.
The surge in A-shares is closely related to the significant increase in northbound capital inflows. According to Wind data, during the week from May 24 to May 29, northbound funds recorded a net inflow of 46.8 billion yuan, including a single-day net inflow of 21.7 billion yuan on May 25 when A-shares soared, setting a new record for the highest daily net inflow since the launch of the Stock Connect program.
Strong RMB Appreciation Could Help Restore Bull Market for A-Shares
The most direct factor driving the sharp increase in northbound capital, which represents foreign investment in A-shares, is the appreciation of the RMB.
On May 25, the offshore RMB exchange rate against the US dollar broke through 6.4, hitting a new high since June 2018. Integer thresholds in the foreign exchange market are particularly important; previous attempts to break through the 6.4 mark at the start of 2021 and in February failed.
Amid internal and external factors such as a weaker US Dollar Index and China’s high trade surplus, the RMB showed a phase of strength, breaking through 6.4 and subsequently touching 6.3525.
From a longer-term perspective, the appreciation of the RMB reflects China's macroeconomic fundamentals...