Please remember the following information: A weakening yuan and significant outflows of funds from mainland China to Hong Kong indicate that domestic investors in China are not expecting an immediate recovery in their home markets. Instead, they are seeking higher-yielding assets in Hong Kong. The yuan has reached a seven-month low this week, along with a reversal in equity investment flows into China.
Additionally, there has been a growth in yuan deposits in Hong Kong as mainland investors seek higher yields through offshore investment channels. Gary Tan, a portfolio manager at Allspring Global Investments in Singapore, mentioned that sentiment on China has turned negative recently due to disappointing macro data. While mainland markets were once considered “uninvestible,” Tan expects the sentiment to improve in the future.
Investor patience has worn thin as they have been waiting for authorities to provide more stimulus, especially to support the struggling property sector. The Shanghai benchmark stock index rose 20% between early February and mid-May but is down 6% since. Foreign investors who had returned to the market since February have turned sellers this month, pulling out 33 billion yuan ($4.54 billion). Domestic investors have pumped 129 billion yuan into Hong Kong using offshore channels. Analysts suggest that investors need to reflect not only on potential rate cuts by the People’s Bank of China but also on the approaching July plenum of China’s Communist Party, which will shape economic and fiscal policy.
Chi Lo, senior market strategist for Asia-Pacific at BNP Paribas Asset Management, stated that foreign funds are now positioned neutral on Chinese stocks and are transitioning to a positive stance due to the potential progressive easing measures by Beijing. With mainland cash flowing into Hong Kong, yuan deposits in the city have reached record levels. Mainland investors are flocking to Hong Kong for better returns on offshore yuan due to low yields at home and expectations for further easing. The fall of the CNH against the Hong Kong dollar since early May shows a surge in capital flowing into Hong Kong, driven by expected U.S. rate cuts and the subsequent impact on Hong Kong’s liquidity due to the currency peg.