Revived appetite for emerging market stocks and bonds isstarting to include China—and even its embattled currency.

China Asset Management Co. has seen more inflows into equityfunds that invest offshore yuan into mainland equitiessince Britain'sJune 23 vote to leave the European Union. CSOP AssetManagement Ltd. had its strongest inflows in 14 months in Juneto an exchange-traded fund (ETF) that pumps yuan held abroad intoChina's sovereign bonds. A net US$604 million has flowed into Chinavia the Renminbi Qualified Foreign Institutional Investorsprogram in the first seven months, versus an outflow of $4.1billion last year, Z-Ben Advisors estimates. Inflows into stockshave dominated this year at about $880 million.

“People are looking again at the emerging markets, which wereundervalued, China for example,” said Freddie Chen, Hong Kong-basedmanaging director at China Asset, which has used just overhalf of its RQFII quota of 21.8 billion yuan ($3.3 billion) andallocated 80 percent to equity with the rest in fixed income. “Wehave seen a lot more interest” after the Brexit vote highlighteddeveloped nation risks, he said.

The inflows will help slow the decline in China'sforeign-exchange reserves and support the yuan, which dropped3.7 percent in the past 12 months in Asia's worst performance. Theymay also add fuel to a rally in the Shanghai Composite Index, whichis up 5.3 percent this quarter but still down 13 percent for 2016.While the nation's sovereign bond yields have plunged this year,they are still high compared with negative rates in Japan andEurope, prompting global funds to boost holdings by the most in twoyears in June.

“Our overseas clients have shown more interest in RQFII lately,”said Melody He, head of exchange-traded funds and indexsolutions in Hong Kong at CSOP, which said on Aug. 11 itsChina 5-Year Treasury Bond ETF tripled assets to 2 billion yuanthis year. “The two main reasons behind it are falling yields indeveloped markets and a stabilizing yuan.”

Morgan Stanley wrote in an Aug. 20 note that there could be a“powerful” catchup rally in Chinese stocks as global investors areagain targeting developing nations. While the Shanghai benchmarkclimbed 16 percent from a low on Jan. 28, that trails a 24 percentrise for the MSCI Emerging Markets index. The best-performing bondfund in China has also said government economic stimulus meansmoney may flow from onshore corporate debt into stocks.

Since RQFII licenses were first awarded in 2011 to promote theglobal use of the yuan, official data show China has granted508.4 billion yuan in quotes to 169 financial institutions. Theproducts suffered heavy redemptions since the currency'sdevaluation last August.

This year, China offered a quota of 250 billion yuan to U.S.institutions, which will lead to more demand for yuan products,according to Li Liuyang, a senior analyst at Bank ofTokyo-Mitsubishi UFJ China Ltd.

One thing that could derail the momentum is a stronger dollar.Federal Reserve vice chairman Stanley Fischer on Sunday signaledthat a 2016 rate hike is still under consideration. The yuan, whichclosed at 6.6499 per dollar today, is forecast to weaken to 6.75 byyear-end, according to a survey of economists by Bloomberg. Yieldson the nation's 10-year sovereign bonds have fallen 10 basis pointsthis year to 2.72 percent. That compares with a 50 basis point dropin average yields for the Bloomberg Emerging Market Local SovereignIndex.

“Although yields have come down in China as well, the Chinesemarket still looks attractive on a relative basis,” said RaymondGui, a Hong Kong-based senior portfolio manager at Income PartnersAsset Management Ltd., which runs an RQFII bond fund.

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.