Research Team at Deutsche Bank, suggests that it looks like the ‘macro prudential’ measures put by the Chinese authorities, in conjunction with their intervention in onshore and offshore RMB markets, is paying off.
“Data from multiple sources suggest that the tide of capital outflows is subsiding, at least for now.
Net FX settlements and sales by Chinese banks on behalf of clients was ~- $34bn in the month of February. After adjusting the same ‘fundamental’ flows (February net trade balance and net FDI transacted in foreign currencies), FX outflow from China during the month amounts to $49bn. This was almost half the outflow in January and the smallest outflow since June last year. This number is broadly in line with the estimates derived using FX reserves after adjusting for FX valuation effects.
At a more granular level, outflows appear driven by corporate activity, such as repayment of FX loans. Since July 2015, FX loans have declined by $120bn to $817bn. In addition, importers remain active in buying USD in the spot market to manage their FX liabilities, while exporters are converting only 47% of their export proceeds from foreign to local currency, which is still low, according to our records. Interestingly though, the recent stability in USD/CNY and the string of macro prudential measures are becoming effective in persuading (1) exporters to bring back more USD and (2) importers to buy less USD. It will be interesting to monitor this flow data in the coming months to see whether corporate clients’ preference for dollars subsides.
In the short term, the authorities should be able to limit CNY weakness alongside a weakening USD following the Fed’s dovish stance at the recent FOMC meeting and the ongoing introduction of macro prudential measures, resulting in a slowdown in outflows. We doubt though the longevity of these conditions, as our house view is that USD strength will re-emerge after its current weakness and that more policy actions from global central banks will provide room for the Fed to hike rates. Hence, we continue to prefer a USD/CNY 6M call spread, despite near-term challenges.”
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