Money is flowing out of China again, putting pressure on the yuan

A slide in the yuan and massive outflows of money from the mainland to Hong Kong show that China’s domestic investors are shelving expectations of an immediate recovery in their domestic markets and fleeing to the nearest higher-yielding assets.

The yuan has fallen to seven-month lows this week, along with a shift in capital investment flows to China.

Analysts said Hong Kong’s stock of yuan deposits has also risen as mainland investors use their limited offshore investment channels to seek higher yields and companies prepare to pay annual dividends, adding to pressure on the currency.

‘DATA CONTINUES TO DISAPPOINT’

“Sentiment towards China worsened over the past month as the market has rallied ahead of improving macro data, which continues to disappoint,” said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments.

Tan, whose funds are underweight in Chinese stocks, said sentiment had come a long way from a time when mainland markets were considered “uninvestable”, however, and he expected it to improve further.

But investor patience has worn thin after months of waiting for authorities to roll out more stimulus, mainly to shore up a sinking property sector.

Shanghai’s stock index rose 20% between early February and mid-May, but is down 6% since then.

Foreigners who had been back in the market since February after being laid off in 2023 also turned sellers this month, pulling in 33 billion yuan ($4.54 billion) through the northern tranche of the Stock Connect Scheme.

Domestic investors have used their foot south to pump 129 billion yuan into Hong Kong.

Analysts say investors have some reason to pause and reflect, not only on how much the People’s Bank of China will ease, 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, although now neutral on Chinese stocks, are turning positive.

“Beijing is likely to keep easing measures more progressive than they have been in 18 months, in my view, and the plenum is likely to reiterate that policy direction,” Lo said.

The PBOC’s daily guidance on the yuan, which it manages in a tight band, is fueling speculation that authorities are allowing some devaluation to manage pressure.

The yuan has fallen 2.2% against the dollar so far this year.

PULL AND PUSH IN HK

As mainland money floods into Hong Kong, yuan deposits in the financial center are at record levels, with the latest official data for April showing them standing at 1.09 trillion yuan ($150 billion), near first-ever peaks. last in January 2022.

Ju Wang, head of Greater China currency and rates strategy at BNP Paribas, said mainland investors were flocking to Hong Kong for better offshore yuan returns, given low domestic yields and expectations of easing further.

Continued southward flows and traditional June-July transfers by Chinese firms to fund their dividend payments to Hong Kong had also led to offshore yuan selling and demand for Hong Kong dollars, she said.

Since the beginning of May, the CNH has fallen 1.9% against the Hong Kong dollar.

Also pulling money into Hong Kong is the expectation of rising US dollar rates as the Federal Reserve prepares to ease policy, which, thanks to Hong Kong’s dollar peg, will also affect its economy.

“US rate cuts are very important for Hong Kong liquidity because of the currency peg, so once the Fed starts cutting rates, I think we’ll be flush with liquidity here, which will it increases asset prices,” said BNP Asset Management’s Lo.

($1=7.2610 Chinese yuan renminbi)