By Winni Zhou and Ankur Banerjee
SHANGHAI/SINGAPORE (Reuters) – A falling yuan and large cash outflows from the mainland to Hong Kong show Chinese domestic investors are putting aside expectations for an immediate recovery in their home markets and fleeing to the nearest, better-yielding assets.
The yuan fell to a seven-month low this week, alongside a reversal in equity investment flows into China.
Analysts said Hong Kong’s stock of yuan deposits has also grown as mainland investors use their limited offshore investment channels to pursue higher returns and companies prepare to pay annual dividends, adding to pressure on the currency.
“Sentiment on China has deteriorated over the past month as the market has recovered ahead of the improvement in macro data, which continues to disappoint,” said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments.
However, Tan, whose funds are underweight Chinese stocks, said sentiment has come a long way since the days when mainland markets were considered “uninvestable” and he expected this to improve further.
But investors’ patience has run out after months of waiting for authorities to roll out more stimulus measures, especially to prop up a sinking real estate sector.
The Shanghai benchmark stock index rose 20% between early February and mid-May, but has since fallen 6%.
Foreigners who have returned to the market since February after quitting in 2023 also turned sellers this month, raising 33 billion yuan ($4.54 billion) through the northern part of the Stock Connect Scheme.
Domestic investors have used the southern side to pump 129 billion yuan into Hong Kong.
Analysts say investors have several reasons to pause and think, not only about how much the People’s Bank of China will cut rates, but also about the Chinese Communist Party’s looming July plenum to shape economic and budgetary policy.
Chi Lo, senior market strategist for Asia Pacific at BNP Paribas (OTC:) Asset Management, said foreign funds, while now neutrally positioned against Chinese stocks, are turning positive.
“Beijing, in my view, is likely to keep the easing measures more progressive than they have been in the 18 months, and the plenum is likely to reiterate that policy direction,” Lo said.
The PBOC’s daily guidance for the yuan, which it manages within a tight range, fuels speculation that authorities are allowing some depreciation to keep pressure in check.
The yuan is down 2.2% against the dollar so far this year.
PULL AND PUSH INTO HQ
As cash from the mainland flows into Hong Kong, yuan deposits in the financial center are at record levels, with the latest official data for April showing them at 1.09 trillion yuan ($150 billion), close to the peaks seen were last seen in January 2022.
Ju Wang, head of Greater China currency and interest rate strategy at BNP Paribas, said mainland investors were flocking to Hong Kong for better returns given low interest rates at home and expectations for further easing.
Continued southward flows and traditional June-July transfers by Chinese companies to finance their dividend payments in Hong Kong had also led to offshore yuan selling and demand for Hong Kong dollars, she said.
Since early May, the CNH has fallen 1.9% against the Hong Kong dollar.
Also attracting money to Hong Kong is expected to be a spike in US dollar yields as the Federal Reserve prepares to ease policy, which, thanks to the Hong Kong dollar peg, will also impact the economy.
“US 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 have plenty of liquidity here, which will push up asset prices,” BNP Asset Management’s Lo said.
($1=7.2610 renminbi)
