Tuesday brought more drama in Chinese markets.
A day on from an egregious selloff in Hong Kong triggered by fears around Xi Jinping’s decision to jettison moderates from the Central Committee and fill four open spots on the Standing Committee with staunch loyalists, the PBoC set the yuan fix at the weakest since 2008 and tweaked cross-border borrowing regulations in an apparent bid to boost foreign capital.
The onshore yuan was testing the weak end of the trading band, and its offshore counterpart hit a record low this week as outflow pressure intensified. During Monday’s equity rout, for example, foreign selling of Mainland shares through the links hit a record, setting 2022 up to be the first year during which overseas investors were net sellers of Chinese equities (figure below).
The links opened in 2017. Mainland shares saw inflows Tuesday, but the message is clear enough: Investors are (belatedly) wary of Chinese assets. As they should be. In my view, it makes little sense to speak about fundamentals for Chinese shares. Xi is the only “fundamental” factor that matters. Just ask any mega-cap Chinese tech company.
“Since the launch of stock connect, foreign investors have consistently been net buyers of Mainland equities, even buying a record last year, despite the bear market,” SocGen’s Frank Benzimra wrote. “The strategic question for China equities investing is whether the reform policy of the last 30 years can survive as the policy balance has shifted to national security and self-reliance.”
“The departure of perceived pro-stimulus officials and reformers from the Politburo Standing Committee and replacement with allies of Xi, suggests ‘Common Prosperity’ will be the overriding push of officials,” TD’s Mitul Kotecha said, of the Party congress. “We do not expect changes to the ‘COVID zero’ policy, or major stimulus measures to be announced anytime soon, likely leaving the CNY and Chinese markets under pressure,” Kotecha added. “National security and technological self-sufficiency will likely be prioritized.”
To be sure, the PBoC was expected to “let the yuan go” (as nearly everyone put it Tuesday) following the Party congress. In the lead up to the pomp, the central bank spent weeks defending the currency with stronger-than-expected fixes, an FX reserve cut, the imposition of a reserve requirement on forwards and other measures, but with the ceremony out of the way, they’re letting it catch up to spot, and also to CNH. The annotated figure (below) gives you some context for the offshore yuan’s slide.
“The CNH-CNY spread is quite extreme at this point,” RBC’s Alvin Tan said. “I think too much. Today’s fix reinforces the view that the PBoC is not drawing a line in the sand, and is letting the renminbi depreciate.”
Some characterized Tuesday’s fix (figure on the left, below) as a mini-devaluation. Some said it presages the offshore yuan making a run at 6.50. Still others trotted out the “it’ll boost exports” talking point.
One analyst noted that accelerating yuan weakness typically comes near the end of strong dollar cycles. “When the yuan’s weakness starts to accelerate, we are not far from the peak of Fed hawkishness,” BNP said.
“Having tried to stabilize it since late September, a much higher USDCNY fixing overnight suggests the PBoC is prepared to let market forces have a greater say,” ING remarked. “At the same time, the PBoC has adjusted macro-prudential factors to allow Chinese institutions to take on greater FX borrowing — a liberalization of inflows to China.”
In addition to the fix adjustment and the tweak to overseas borrowing rules, the PBoC also injected 230 billion yuan through 7-day repos on Tuesday to offset tax payments and government bond sales and, according to one media report, set out new “ethics standards” for fintech companies. “The essence” of fintech is finance, the PBoC reportedly said. “Blurring” the line between tech and finance isn’t something the Party wants to see. Tech companies, officials suggested, shouldn’t operate unlicensed finance operations under the guise of “innovation.” (Think: Ant.)
Later, in a statement documenting a meeting held to “study” the Party congress, the PBoC said the yuan will remain “basically stable,” as will consumer prices. Momentum in domestic demand is “becoming clear,” officials mused. China’s potential growth rate “remains high.”
Over on the stock side, most of your readers have begrudgingly accepted that in the USA, economics and company fundamentals no longer have as much impact on intra-day stock market movements as do algos, algos that prey on other algos and robotraders.
Why not look at the Sunday night (US time) price action in the same light? Much of it was likely triggered by pros putting on a major pairs trade. Who else would be prepared and willing to slam the HK/Chinese market at the opening bell while pegging up the S&P futures 35 points at the same time?
Others followed, spec & real.
So Marko K just may be right IF the pairs trade does not quickly work.
But longer-term it’s hard to get excited when the further division of the global economy is clearly in motion.