This daily digest focuses on Yuan rates, major Chinese economic data, market sentiment, new developments in China’s foreign exchange policies, changes in financial market regulations, as well as market news typically available only in Chinese-language sources.
- Yuan deposits in Hong Kong in August dropped to the lowest level since February 2013.
- The PBOC will provide moderate liquidity and guide credit and financing to grow at an appropriate rate.
- China’s securities regulator will remove limits on asset allocations under QFII and RQFII programs.
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Key Economic Indicators for Yuan Rates
- Yuan-denominated deposits in Hong Kong dropped -2.1% to 652.9 billion Yuan in August from the month prior, according to Hong Kong Monetary Authority; this is the lowest level since February 2013. The deposits gauge can be used as a market sentiment indicator for the Chinese currency in its largest offshore center.
Before 2015, Yuan deposits in Hong Kong was in an upward trend amid the rising role of the currency in the region. In December 2014, Yuan deposits in the offshore center hit the highest level of 1.0036 trillion Yuan and moved around that level in early 2015. On August 11th, the Chinese currency was de-pegged against the U.S. Dollar. Since then, Yuan deposits in Hong Kong banks started to decline.
Data downloaded from Bloomberg; chart prepared by Renee Mu.
The level of Yuan deposits in Hong Kong is mostly consistent with moves in Dollar/Yuan rates. When the Yuan rose against the U.S. Dollar in early years, individuals and companies increased their Yuan holdings as well. After Yuan’s de-pegging, the currency has come under devaluation pressure. As a result, Hongkongers began to reduce their Yuan holdings.
Data downloaded from Bloomberg; chart prepared by Renee Mu.
- China’s Caixin manufacturing PMI print for September came out at 50.1 as expected, rising from 50.0 from the month prior. The read indicates a slight expansion in manufacturing sectors. However, amid production cuts as well as the slow growth in private investment, Chinese producers may still face pressure over the following months. The official PMI print for September to be released at 9pm EDT today will give out more clues on the conditions of Chinese manufacturing firms.
Data downloaded from Bloomberg; chart prepared by Renee Mu.
Market News
PBOC News: China’s Central Bank.
- The PBOC said that Yuan’s official inclusion in SDR basket will ‘contribute to the stability of Yuan exchange rates’, according to a statement issued by the regulator on September 30th. Following Yuan’s official entry, it is expected that the overseas demand in Yuan-denominated assets will increase and the corresponding capital inflows will help to steady Yuan rates. The full text can be found here.
- The PBOC’s Monetary Policy Committee hosted the third quarter meeting and released policy targets for the following periods: the Central Bank will maintain prudent monetary policy and flexibly use multiple policy tools. The regulator will provide moderate liquidity and guide credit and financing to grow at an appropriate rate. In terms of exchange rates, the Central Bank will maintain Yuan rates stable within a reasonable range.
This week PBOC has been tightening onshore Yuan liquidity, which is unusual before a major holiday. We discussed that it signals the regulator continues on its tweaked short-term credit strategy. PBOC’s statement released on Friday confirms this intention. China’s home loans have been increasing at a rapid rate and contributed to the largest portion of New Yuan Loans. At the same time, financial institutions have taken advantage of cheap short-term funds provided by the Central Bank and purchased longer term bonds. Both activities increase the risk of price bubbles. As a result, the regulator set managing liquidity and credit growth as one of the major targets over the following periods.
Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active users monthly.
- China’s securities regulator will remove restrictions on asset allocations under QFII and RQFII programs. Qualified foreign institutional investors may purchase Chinese stocks, bonds and other assets through these programs. Previously, the securities regulator issued guidance requiring QFII investors to place at least 50% of total assets in stocks and hold no more than 20% in cash. Under the new rule, investors may make their own decisions on asset allocations.
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