FX:
PBoC kicked things off with a 6.8898 fix against the dollar, down 79bp from Friday and the lowest since January 17. The RMB spot rate was also trending lower in onshore (CNY) and offshore (CNH) markets. The CNY fell 0.13% to 6.8863 at 10am, according to Wind data. The CNH was trading at 6.8768, down 0.17% from the previous session.
The RMB's weakness was a response to broader dollar strength, with the dollar index (DXY) at 100.93 points, up 0.19% on a day earlier. The strengthening came on the back of comments by US president Donald Trump on upcoming tax reforms. The prospect of a US-China trade war, however, was temporarily put on hold after Trump told Chinese president Xi Jinping that he recognised the validity of China’s One China policy in a phone call.
China’s currency indices closed largely flat last week. The CFETS index was unchanged on February 10 from a week earlier at 94.03. The special drawing rights basket index closed 0.07% up at 95.50, while the one by the Bank for International Settlements also inched up from 95.26 to 95.29.
CFETS said in a February 9 announcement that it had awarded China Merchants Bank Singapore branch a licence to enter the onshore FX lending market, expanding the ranks of foreign financial institutions given access to the market.
ICBC has taken up the role of market maker for seven additional currencies that have been enabled for direct trading with the RMB, namely the Danish krone, Swedish krona, Norwegian krone, Hungarian forint, Polish zloty, Turkish lira and Mexican peso, the bank said on February 9. ICBC was also the first to facilitate trades between the RMB and the above currencies excluding the Swedish krona and Norwegian krone.
Investment flows:
Preliminary data on China's Q4 balance of payments show that net capital outflows amounted to $188bn in Q4 2016, implying some $654bn total for the entire year, the Institute of International Finance (IIF) wrote in a February 10 report. This puts the year total just $20bn below the 2015 total, but the amount spent to defend the RMB in 2016 was $450bn, or $110bn more than a year earlier, the report added.
Some of the outflows came through the established investment schemes.
“Outbound portfolio investment was close to $100bn in 2016 via schemes such as QDII and HK-SH Stock Connect,” the report said. “Despite a major open-up of China's onshore bond markets, the inbound bond investment was only $30bn, about one-third of the outbound portfolio investment.”
IIF said that the panic repayment of external debt seems over as companies started to borrow foreign debt again while the domestic economy stabilised.
The turnover in the Hong Kong stock market rose to near HK$100bn past week, as the Hang Seng China Enterprises Index surged to over one-year high, Tommy Xie, economist with OCBC, said in a report. Southbound flows via the Shanghai-Hong Kong stock link stood over Rmb1bn ($146m) on a daily basis for most trading days over the past two weeks.
“Hong Kong stock market seems to benefit from the tighter capital control in the mainland China,” Xie wrote. “There is also market talk that tighter capital controls prompted Mainland companies to invest in HK stock market instead of M&A deals with their idle capital.”
Kevin Liu, equity strategist with CICC, said the trend would keep boosting the Hong Kong market.
“The strong gain last week has not only swept away short-term weakness post Chinese New Year, but also made H-shares one of the best-performing (~8%) markets YTD around the globe, not to mention its outperformance vs. A-shares,” he wrote on February 13.