Chinese markets are being tested by foreign outflows and currency depreciation

Hong Kong — The withdrawal of foreign capital from China and the depreciation of the yuan prompted a comparison with 2015, when Beijing faced a vicious cycle of outflows and currency depreciation.

China has closed many holes that once allowed people and businesses to move their money abroad, this time reducing the likelihood of a volatile outflow of their own money.

However, after years of large international purchases of RMB-denominated stocks and bonds, some market participants may be depleted of these foreign flows and depreciate asset prices and currencies. I’m asking if I have sex. The second pillar of its original strength has also been shaken by the phenomenal export boom that China enjoyed when the pandemic receded.

China’s bond market has seen significant outflows for the third straight month in April, as shown by data from China’s clearing house. In three months, foreign investors have reduced their holdings by about 301.4 billion yuan. That’s $ 45,030 million.

Foreigners have also withdrawn from the Chinese stock market, selling net 33.2 billion yuan (equivalent to $ 4.9 billion) of Chinese land stocks through a stock connect trading link with Hong Kong between early March and Friday. rice field.

According to FactSet, the yuan has been trading narrowly for several months since mid-April and then fell sharply, dropping nearly 5% annually to about $ 6.69 per dollar. On May 12, it exceeded 6.82 against the dollar and reached its weakest level in almost 20 months.

“Inevitably, the question started. Is this a repeat of the summer of 2015?” A Barclays analyst wrote a note to the client in late April.

That year, following a gradual decline in the yuan during the sale of the stock market, Rush of capital for the exit.. By the end of the year, China had spent about $ 700 billion in foreign exchange reserves to support its currency.

However, the Barclays team claimed that the comparison was overkill. This time, Chinese policymakers haven’t put huge amounts of money into the financial system. That is, it does not have the same excess liquidity as looking for an escape route. And Beijing is much better at domestic capital regulation, they wrote.This helps explain the reason for depreciation in 2019 $ 1 from the last 7 yuan It did not lead to a major capital flight.

Prior to the 2015-16 crisis, China’s focus was not on stopping the yuan’s rise, but on hot money betting on the yuan’s rise, said Becky Liu, head of China’s macro strategy at Standard Chartered Bank. It was to curb the inflow.

This meant that there were plenty of channels for fraudulent outbound payments, Liu said. But no longer she says: “These loopholes are currently closed and spills under legitimate channels are manageable and may continue to be manageable.”

China’s State Administration of Foreign Exchange said it has adopted a zero-tolerance approach to foreign exchange rule violations. A regulatory agency known as SAFE said it has stepped up efforts to prevent and control the transfer of funds through illegal channels.

Jean-Mah, chief China economist at the Institute of International Finance, said the pandemic has shrunk the tourism industry, which was the cause of previous household outflows. There are also legitimate routes for individuals to convert money, such as $ 50,000 a year for personal exchange allocations, but banks have a lot of discretion on how to handle these operations. He said he had the right.

China’s policy makers have promised to support the economy, including: Internet technology sector in need.. They have recently taken steps to support the dying housing market. Reduction of long-term benchmark loan interest rate Make mortgages cheaper for first-time homebuyers.

Still, there are many reasons for investors around the world to be aware of. Beijing’s Zero-COVID policy has created economic tensions, and the effects of numerous corporate crackdowns are still reverberating. The yield benefits that Chinese bonds offer over US equivalents are gone. And China, which is reluctant to break up with Russia over Ukraine, raises questions about geopolitical risks.

The spill is modest compared to the overall foreign holdings. As of December, foreign entities have approximately $ 1.2 trillion in land assets in RMB, with almost even splits between equities and bonds, according to data from the Central Bank of China.

Benchmark Shanghai Composite has shown a rebound of about 9% since hitting its lowest point in almost two years in April, with the yuan falling slightly last week. Net stock flow has recently turned positive.

Some international investors also seem less pessimistic, suggesting that foreign purchases may pick up again.

“The outlook for Chinese equities has improved,” said Andrew Swan, former head of Asian equities at ManGLG. He said the recent yuan sellout wasn’t too big or worried, and Chinese policymakers recognized that “it’s time to stimulate the economy.”

Guan Tao, Global Chief Economist and former SAFE official at Bank of China International Securities, said the actions of foreign investors could weigh on the sentiment of the domestic market. But he said China’s trade surplus was enough to offset the outflow and long-term moves to the Chinese market would continue.

“China’s financial markets have just opened and most of the foreign capital is still increasing its allocation,” he said. “A large amount of foreign capital is about to come in.”

Benchmark Shanghai Composite has recovered about 9% since reaching its lowest point in almost two years in April.


alex plavevski / Shutterstock

Similarly, SAFE said China’s growth is relatively rapid and RMB assets offer diversification and relatively high returns. He said the recent depreciation was mainly caused by international market trends and short-term changes in sentiment. “The trend of long-term allocation of foreign capital to RMB-denominated assets has not changed,” regulators said.

Many market watchers, like Guan, argue that global investors are likely to remain long-term buyers of Chinese assets. They say that given the size of China’s economy and its markets, the global investment community still undervalues ​​land assets, and that Chinese securities can help diversify their portfolios.

Others are not very optimistic. “Is this reversal a blip or a major inflection? That’s the problem the market is facing right now,” said Logan Wright, director of Chinese market research at Rhodium Group.

Wright said it was too early to answer that question and see if China was also suffering from a large outflow from the country. But sustained outflows will be bearish for currencies and China’s asset values, he said. Already, the People’s Bank of China must weigh the trade-offs between the internal and external impacts of monetary policy changes, he said.

Freya Beamish, head of macro research at TS Lombard, said the Chinese government is “fighting defeat. We need to give something” to pursue the Zero-COVID policy and at the same time generate strong growth.

Mr Beamish said China is likely to expand its relatively stable money supply lately. The result is pressure on the yuan, also known as the yuan.

“Which method of reduction results in liquidity, floor growth or slowing growth, and the fact that the financial sector cannot accept it anyway. In any case, the yuan depreciates. Will occur. ” “This year’s capital outflow is a serious risk.”

Write to Rebecca Feng at rebecca.feng@wsj.comQuentin Webb at And Dave Sebastian

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Chinese markets are being tested by foreign outflows and currency depreciation

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