Winnie Zhou and Ankur Banerjee
SHANGHAI/SINGAPORE (Reuters) – A weaker yuan and widespread cash flows from the mainland to Hong Kong show China’s domestic investors are putting aside hopes of an immediate recovery in their home markets and fleeing to nearby higher-yielding assets.
The yuan fell to a seven-month low this week, coinciding with a reversal in equity investment flows into China.
Analysts said stocks of yuan deposits in Hong Kong have also risen as mainland investors use their limited offshore investment channels for higher returns and companies prepare to pay annual dividends, adding pressure on the currency.
“Sentiment on China has weakened over the past month as the market rose ahead of improving macro data, which continues to disappoint,” said Gary Tan, portfolio manager at Allspring Global Investments in Singapore.
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 expects the situation to improve further.
But investors’ patience has worn thin after months of waiting for authorities to introduce more stimulus measures, mainly to prop up the sinking real estate sector.
Shanghai’s benchmark stock index rose 20% between early February and mid-May but has fallen 6% since then.
Foreigners, who have returned to the market since February after exiting the market in 2023, also turned into sellers this month, withdrawing 33 billion yuan ($4.54 billion) through the northern part of the Stock Connect scheme.
Domestic investors have used the southern section to pump 129 billion yuan into Hong Kong.
Analysts say investors have several reasons to pause and think: not only about how far the People’s Bank of China will cut rates, but also about the upcoming July plenum of the Chinese Communist Party, which will set economic and fiscal policy.
Chi Lo, senior market strategist for Asia-Pacific at BNP Paribas (OTC:) Asset Management, said foreign funds, although currently neutral on Chinese stocks, are turning positive.
“In my view, Beijing is likely to maintain more progressive easing measures than they have been for 18 months, and the plenum is likely to confirm this policy direction,” Lo said.
The PBOC’s daily forecasts for the yuan, which it manages within a narrow band, are fueling speculation that authorities are allowing some devaluation to cope with the pressure.
The yuan has fallen 2.2% against the dollar this year.
PULL AND PUSH TO HONG KONG
As mainland cash 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), near peaks. which were last observed in January 2022.
Ju Wang, head of Greater China FX and interest rate strategy at BNP Paribas, said investors from mainland China were flocking to Hong Kong in search of better yields given weak domestic yields and expectations of further easing.
Continued southward capital flows and traditional transfers by Chinese firms in June-July to fund dividend payments in Hong Kong also led to sales of offshore yuan and demand for Hong Kong dollars, she said.
Since the beginning of May, the CNH index has fallen 1.9% against the Hong Kong dollar.
Attracting money to Hong Kong also comes as US dollar rates are expected to peak as the Federal Reserve prepares to ease policy, which due to the Hong Kong dollar’s peg will impact its economy.
“US rate cuts are very important for Hong Kong liquidity due to the currency peg, so once the Fed starts cutting rates, I think we will have enough liquidity here, which will lead to higher asset prices,” said BNP Asset’s Lo Management.
($1 = 7.2610 yuan)