Cash is leaving China again, pressuring yuan
By Winni Zhou and Ankur Banerjee
SHANGHAI/SINGAPORE, June 21 (Reuters) -A sliding yuan and extensive outflows of cash from the mainland into Hong Kong show China's domestic investors are shelving expectations for any immediate recovery in their home markets and fleeing to the closest better-yielding assets.
The yuan has dropped to seven-month lows this week, alongside a reversal in equity investment flows into China.
Analysts said Hong Kong's stockpile of yuan deposits has also grown as mainland investors use their limited offshore investment channels to seek higher yields and companies prepare to pay annual dividends, adding to the pressure on the currency.
"Sentiment on China soured over the past month as the market has rallied ahead of improvement in macro data which continues to disappoint," said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments.
Tan, whose funds are underweight on Chinese stocks, said sentiment had come a long way from a time when mainland markets were considered "uninvestible", however, and he expected that would improve further.
But investor patience has worn thin after months of waiting for authorities to roll out more stimulus, mainly to support a sinking property sector.
The Shanghai benchmark stock index .SSEC rose 20% between early February and mid-May but is down 6% since.
Foreigners who had returned to the market since February, after quitting in 2023, have turned sellers too this month, pulling out 33 billion yuan ($4.54 billion) via the northbound leg of the Stock Connect Scheme.
Domestic investors have used the southbound leg to pump 129 billion yuan into Hong Kong.
Analysts say investors have several reasons to pause and reflect, not just about how far the People's Bank of China will ease rates, but also on the approaching July plenum of China's Communist Party to shape economic and fiscal policy.
Chi Lo, senior market strategist for Asia-Pacific at BNP Paribas Asset Management, said foreign funds, though now positioned neutral on Chinese stocks, are turning positive.
"Beijing is likely to keep the easing measures more progressive than they were in the 18 months, in my view, and the plenum will likely reiterate that policy direction," Lo said.
The PBOC's daily guidance for the yuan CNY=CFXS, which it manages in a tight band, is stirring speculation that the authorities are allowing some depreciation to manage the pressure.
The yuan is down 2.2% against the dollar so far this year.
PULL AND PUSH INTO HK
As mainland cash floods into Hong Kong, yuan deposits in the financial hub are at record levels, with latest official data for April showing they stand at 1.09 trillion yuan ($150 billion), close to peaks last seen in January 2022.
Ju Wang, head of Greater China currency and rates strategy at BNP Paribas, said mainland investors were thronging Hong Kong for better returns on offshore yuan CNH=D3, given low yields at home and expectations for further easing.
Persistent southbound flows and the traditional June-July transfers by Chinese firms to finance their dividend payments in Hong Kong had also led to selling of the offshore yuan CNH= and demand for Hong Kong dollars, she said.
Since early May, the CNH has fallen 1.9% against the Hong Kong dollar HKDCNH=R.
Also drawing money into Hong Kong is the expectation of peaking U.S. dollar rates as the Federal Reserve prepares to ease policy, which, by virtue of the Hong Kong dollar's peg, will affect its economy too.
"U.S. rate cuts are very important for Hong Kong's liquidity because of the currency peg, so once the Fed starts cutting rates, I think we will be flush with liquidity here, which will push up asset prices,” said BNP Asset Management's Lo.
($1=7.2610 Chinese yuan renminbi)
Additional reporting by Jason Xue and Li Gu in Shanghai; Editing by Clarence Fernandez
Writing by Vidya Ranganathan
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
