By Winnie Chu and Ankur Banerjee
SHANGHAI/SINGAPORE (Reuters) – A falling yuan and widespread cash flows from the mainland to Hong Kong show that domestic investors in China are pinning their expectations on any immediate recovery in their home markets and fleeing to the nearest assets with better returns.
The yuan fell to its lowest levels in seven months this week, along with a reversal in stock investment flows into China.
Hong Kong's stock of yuan deposits has also increased as mainland investors use their limited investment channels abroad to seek higher returns and companies are willing to pay annual dividends, adding pressure on the currency, analysts said.
“Sentiment towards China has deteriorated over the past month with the market rising ahead of improving macro data that remains disappointing,” said Gary Tan, portfolio manager at Singapore-based Allspring Global Investments.
Tan, whose funds are underweight in Chinese stocks, said sentiment had come a long way since mainland markets were considered “uninvestable”, and he expected the situation to improve further.
But investors' patience is running out after months of waiting for the authorities to roll out more stimulus, mainly to support the deteriorating real estate sector.
The benchmark Shanghai stock index rose 20% between early February and mid-May, but has fallen 6% since then.
Foreigners who have been back in the market since February, after quitting in 2023, also turned sellers this month, withdrawing 33 billion yuan ($4.54 billion) via the northern part of the Stock Connect Scheme.
Local investors have used the southbound terminal to pump 129 billion yuan into Hong Kong.
Analysts say investors have several reasons to pause and think, not only about the extent to which the People's Bank of China will ease interest rates, but also about the approaching July plenum of the Chinese Communist Party to shape economic and fiscal policy.
Foreign funds, although now neutral on Chinese stocks, have turned positive, said Qi Lu, chief market strategist for Asia-Pacific at asset manager BNP Paribas (OTC:).
“Beijing is likely to keep its mitigation measures more progressive than it has over the past 18 months, in my view, and the plenum is likely to reiterate this policy direction,” Lu said.
The People's Bank of China's daily guidance for the yuan, which it manages in a narrow range, raises speculation that authorities are allowing some depreciation in the currency's value to manage pressures.
The yuan has fallen 2.2% against the dollar so far this year.
Withdraw and pay to Hong Kong
As mainland cash flows into Hong Kong, yuan deposits in the financial hub have reached record levels, with the latest official data for April showing them at 1.09 trillion yuan ($150 billion), near the peak last seen in January 2022.
Mainland investors are flocking to Hong Kong for better returns, given lower yields at home and expectations for further easing, said Joe Wang, head of Greater China currency and interest rates strategy at BNP Paribas.
Continued southward flows and traditional remittances from June to July by Chinese companies to finance their dividend payments in Hong Kong also led to selling of the yuan abroad and demand for the Hong Kong dollar, it added.
Since early May, the Chinese yuan has fallen by 1.9% against the Hong Kong dollar.
Also attracting money to Hong Kong is the expectation that dollar prices will peak as the Fed prepares to ease policy, which will impact its economy as well, thanks to the Hong Kong dollar peg.
“US interest rate cuts are very important for liquidity in Hong Kong because of the currency peg, so once the Fed starts cutting interest rates, I think we will have liquidity here, which will push asset prices higher,” said BNP Asset Management's Luo.
($1 = 7.2610 RMB)
