On February 17, 2022, Ukrainian government forces actively shelled the disputed Republic of Lugans and other places in the eastern part of the country, firing the first shot of the war between Russia and Ukraine. After that, the armed conflict between the two sides intensified, the global stock market was hit hard, and crude oil and gold soared. How are traditional safe-haven assets performing in this round of war? What are the similarities and differences between RMB as a "new" safe-haven capital darling and traditional safe-haven assets? We will discuss this topic in this article.

I. the essence of "risk aversion"

The safe-haven assets recognized by the market include the Swiss franc, yen, gold, silver and US debt, and the US dollar also shows the characteristics of safe-haven appreciation in some periods. In the current round of Russia-Ukraine war, the RMB exchange rate broke away from the "risk attribute" of traditional emerging market currencies and deviated from the appreciation of the dollar index, showing the characteristics of standard safe-haven assets.

What are the similarities and differences between the safe-haven property of RMB and other safe-haven assets? We should start with the "nature" of safe-haven assets.For the Swiss franc and the yen, the essence of "risk aversion" lies in its financing currency attribute.During the high-risk period, Japanese and Swiss investors earn spreads by investing in overseas high-interest assets after exchange in their own currencies, and overseas investors can also obtain low-cost funds by integrating Japanese yen and Swiss francs. Then invest it in high-interest assets to achieve excess returns (that is, carry trade), during which the yen and Swiss francs will depreciate. When the risk event comes, the fall in high-interest assets and exchange rate fluctuations erode the arbitrage yield, the risk aversion of domestic investors will also increase, and the unwinding of carry trades and the deleveraging of foreign currency leverage by domestic investors will drive the capital back to Japan / Switzerland. Yen and Swiss franc safe haven appreciation. As shown in chart 2, U. S. stocks tend to fluctuate on the eve of long positions in Japanese yen and Swiss francs.The "risk aversion" attribute of the US dollar comes from its standard currency status.When there is a war or recession, the dollar as a global reserve currency is regarded as a "liquid and safe asset". In extreme cases, there will even be a dollar liquidity crisis, passively pushing up the dollar index. If the US economy "outshines others" after the outbreak of war and recession, and the Fed takes the lead in tightening monetary policy relative to non-US economies, the momentum for the appreciation of the dollar will be stronger.The "risk aversion" of US debt is achieved by the dollar's base currency status and low interest rate expectations.The status of the dollar standard currency has established its "safe haven" attribute, and compared with the stock market, the bond market has a stronger defensive attribute, thus forming the risk aversion and appreciation characteristics of US debt. The increase in US debt holdings implies the expectation that "monetary policy is loose and thus underpin the economy".Therefore, the safe-haven properties of US debt and US dollar are often out of sync. If the risk event "encounters" the Fed tightening cycle, the safe-haven attribute of US debt will fade, but the appreciation of the US dollar will be greater.In addition, the safe-haven nature of US debt is limited by the following factors:One is bearish bonds with high inflation expectations, so the safe-haven nature of US bonds has been enhanced after the world entered an era of low inflation in 2000.Since then, inflation expectations have continued to rise in the epidemic era, so that US debt did not perform well in the Russian-Ukrainian war in 2022. Second, once the war involves the United States, US debt will also lose its risk aversion function.The root of gold and silver "risk aversion" lies in "anti-inflation".Gold tends to gain strong upward momentum if wars, especially those of oil-producing countries, global water release in response to recession or the collapse of the monetary credit system lead to a sharp rise in inflation expectations. On the contrary,Risk events that do not trigger a sharp rise in inflation will not trigger the safe-haven appreciation of gold and silver, and the impact will only be pulsating, while the persistence of the rise brought about by "anti-inflation" is better.

The "risk aversion" of the RMB is different from the above-mentioned known paradigm.Unlike the Japanese yen and the Swiss franc, the RMB does not have the conditions to become a financing currency.In the working paper "The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis" published by IMF in 2013, the necessary conditions for financing currency are summarized as three elements: "low interest rate + large net position of overseas assets + sufficient liquidity and depth of financial market". At present, the level of interest rates in China is significantly higher than that in developed economies, and without taking into account the country's foreign exchange reserves, private international investment positions still show net liabilities (see chart 3).

The "risk aversion attribute" of RMB comes from the investment attraction of RMB assets.During the current Russian-Ukrainian war, due to the loose domestic monetary environment and the advantages of the supply chain, mild domestic inflation led to high real interest rates, and RMB assets became a "safe haven" for dangerous capital. In addition, Russia's kick out of the SWIFT also exposed the risk of long-arm regulation in the United States, which will speed up the process of global de-dollarization. In Russia, for example, the proportion of US dollar reserves in Russia's total foreign exchange reserves fell from 45.8 per cent at the beginning of 2018 to 16.4 per cent (about US $97 billion) at the end of June 2021, while the share of RMB reserves rose from 2.8 per cent to 13.2 per cent (about US $78.1 billion). If the remaining US dollar reserves are converted into RMB reserves at the ratio of 3x1, it will bring inflows of about US $32 billion (about 200 billion yuan). In the long run, the proportion of RMB in international settlement and foreign exchange reserves will tend to rise, making RMB assets attractive to foreign investors.

The risk aversion and appreciation of Japanese yen / Swiss franc and RMB are triggered by financing behavior and investment behavior respectively, so from the point of view of balance of payments, the change of yen position size is closely related to the sub-item of "other investment". The fluctuation of RMB exchange rate is affected by capital changes under "securities investment".(see figures 4 and 5).

Second, the performance of safe-haven assets in previous "transnational wars"

We review all the transnational wars that have taken place since 1970 and review the performance of safe-haven assets before and after each war. As shown in figure 6, excluding civil wars and wars of independence, as well as small battles with a death toll of less than 2000, there have been 22 major transnational wars around the world since 1970.

According to the time when the war occurred, we divided it into three stages: 1970 to 1980, 1980 to 2000, and 2000 to the present. We counted the performance of traditional safe haven assets-Japanese yen, Swiss franc, gold, silver and US debt before and after the war. There are about 6-7 wars in each stage. The results are shown in figures 8 to 11, and detailed illustrations are shown in tables 15 to 19 in the appendix. Between 1970 and 1980, precious metals showed excellent risk aversion, and silver rose more on average than gold. The Japanese yen, the Swiss franc and the US dollar also show strong risk aversion, and the Swiss franc is stronger than the Japanese yen. Although the Swiss franc, the yen and the dollar were divided after previous wars from 1980 to 2000, they were more risk-averse than precious metals as a whole, and the yen outperformed the Swiss franc and the dollar. The safe-haven properties of gold and silver faded. U. S. Treasuries suffered a massive sell-off in the two months after the war, and prices rebounded.

Silver has been the strongest risk aversion since 2000, showing a strong rise in the rest of the year, except for the adjustment after the independence of Crimea in February 2014, especially in the two weeks after the outbreak of the war. Gold underperformed silver, similar to the movements of the yen and the Swiss franc. Us debt showed a strong risk aversion in the second month after the war. From the perspective of the performance of different stages of the same asset, the yen was the most successful in risk aversion from 1980 to 2000, and showed a trend to rise in the six months after the war, but the differentiation was obvious after previous wars.After 2002, the Japanese yen showed obvious "anti-falling" characteristics in the two months after the outbreak of previous wars.Japan had not yet entered the era of low interest rates between 1970 and 1980, and the yen fell back within two months after the war broke out.The Swiss franc is the most stable of all safe-haven assets.Whether from 1970 to 1980, from 1980 to 2000, or from 2000 to the present, the Swiss franc experienced safe-haven appreciation in the 20 days after the war broke out, and gave up some of its gains in the following two months. Between 1970 and 1980, the Swiss franc experienced a larger and faster second round of appreciation in the third month after the war. Apart from the conflict between Russia and Ukraine, the dollar index has historically performed poorly within one month after the outbreak of the war.The dollar index is likely to appreciate in the second to third months after the war, which may be related to the tight liquidity of the dollar that has been simmering with the war.Commodity production cycle and global inflation expectations affect the risk aversion of precious metals, and gold and silver are significantly better in the period of investment cycle and high inflation expectations.Gold and silver were the most risk-averse between 1970 and 1980, showing a rising trend in the six months after the war, a combination of "high inflation and commodity bull market". After 2000, the global inflation center fell back, and gold and silver showed a safe-haven appreciation in the first month after the outbreak of the war, with an average increase similar to that from 1970 to 1980, before entering a volatile market. Commodities were in the mining cycle from 1980 to 2000, with the exception of oil prices rising sharply after the Gulf War in 1990 and falling after the war (see chart 12). Gold and silver fell most of the time after the war. The safe-haven nature of US debt was not prominent before 2000, and it was sold by investors most of the time after the war broke out. The risk aversion of US debt deepened after 2000, with prices rising in the first two months after the war, but returning to the downward path in the third month. After the market-oriented fluctuation of the RMB exchange rate, the trend diverged in February 2014, April 2016 and September 2020. Before the current round of Russia-Ukraine war, the RMB did not have an obvious risk aversion attribute.

III. The hedging effect of safe-haven assets on US stocks in previous "transnational wars"

Using the same method to divide time periods, we compare the hedging effects of various safe-haven assets on US stocks. The results are shown in figure 13. See the appendix, Chart 20 and Chart 21. Except between 1980 and 2000, when the commodity bear market caused precious metals to lose their safe-haven properties, gold and silver were the best hedges against US stocks. In the safe-haven currency, the Swiss franc also has a good hedging effect on US stocks, especially the risk of short-term decline in US stocks 15 days after the hedging war.

The safe-haven effect of the yen is inferior to that of the Swiss franc most of the time. The dollar's hedging effect against US stocks was the weakest from 1970 to 1980 and was similar to the Swiss franc the rest of the time. After 2000, with the exception of the September 11 incident in 2001 and the Russian-Ukrainian war in February 2022, the overall hedging effect of US debt on US stocks is better. Of the two "exceptions", the former involves the United States, while the latter coincides with rising global inflation expectations and weakening the safe-haven nature of US debt. The negative impact of the war on US stocks before 2000 was more lasting, lasting about 120 days. After 2000, US stocks tend to return to the upward path quickly after a brief correction (about 15 days).

Note: details of the performance of safe-haven assets in previous wars