Don’t be fooled by the yuan’s state of calm — there are plenty of depreciation pressures circling the country’s currency market.
(Bloomberg) — Don’t be fooled by the yuan’s state of calm — there are plenty of depreciation pressures circling the country’s currency market.
Geopolitical risks and increasing scrutiny on foreign firms means international funds will probably be reluctant to invest big in Chinese stocks — limiting the prospect of capital inflows. Purchases of mainland stocks via links with Hong Kong have been tepid in recent weeks, while some foreign funds are flocking to India’s markets instead.
Chinese government bonds still offer negative carry over comparable Treasuries, diminishing the appeal of yuan-denominated assets. The strengthening of domestic consumption — coupled with weakening global demand — puts pressure on China’s trade balance, for which more data is due next week.
Strategists at BNP Paribas have recommended shorting the Chinese currency. Citigroup Inc.’s team says the yuan basket will fall to a range of 94-95 in the coming months, levels not seen since late 2020.
The yuan has been flat against the dollar since mid March, with a gauge of one-month swings near the lowest in more than a year. Traders have been wary of placing large wagers due to an uneven economic recovery, while US inflation and the Federal Reserve’s policy cycle complicates the outlook for currency markets around the world.
But the yuan tends to see periods of calm followed by rapid moves — take September or April of last year. The market is vulnerable to what happens to the Japanese yen and currencies of other trading partners. Those with a hunch the calmness will be short-lived will find it cheap to bet on wider swings ahead.
Here’s my roundup of the week’s key developments for China markets:
Two speeds
Travel in China surged over the Labor Day holidays, with residents making far more trips across the country than even before the pandemic. Tourism spending was only 0.7% higher than 2019 levels though, while a contraction in manufacturing activity showed risks to the economic recovery.
- China Two-Speed Economic Recovery Fuels Concerns on Outlook
- China Holiday Travel Exceeds Pre-Covid Level in Boost to Economy
Comeback city
A key destination for mainland tourists has been Hong Kong. The city’s economy expanded 2.7% in the first quarter, helped by local consumption and an influx of visitors from across the border. While growth was better than expected, it compares with a low base last year when the city was battling its deadliest Covid outbreak.
- Hong Kong Exits Recession as Spending Boom Revives Growth
- Hong Kong’s Retail Sales Jump in March as Rebound Strengthens
Supply chains
US lawmakers are asking companies including Nike Inc. and Adidas AG to show what steps they’ve taken to comply with laws banning imports from Xinjiang. The US has accused China of requiring Uyghurs in the region to work against their will — allegations that the government in Beijing has repeatedly rejected.
- US Lawmakers Query Nike, Adidas Over Forced Labor in China
Foreign access
Chinese financial data providers have recently stopped providing detailed information on local companies to overseas clients. Police inspections of US consultancies are also increasing. The scrutiny comes after Beijing passed a new law that expanded the list of activities that could be considered spying.
- China Restricts Overseas Access to Key Corporate Information
- China Asks SOEs to Enhance Security Checks When Picking Auditors
Gas deals
Oil giant Sinopec is among those looking to invest in a new gas field project in Saudi Arabia, which has some of the biggest gas reserves in the world. China is increasingly seeking deals in the Middle East after Russia’s invasion of Ukraine led to a surge in demand for natural gas.
- Aramco in Talks With Sinopec, Total on $10 Billion Gas Deal
Tapping US capital
Alibaba Group Holding Ltd.’s international online shopping unit is exploring a US initial public offering. It would join a number of high-profile Chinese firms including Shein seeking to tap American capital. The strategy is one way of attracting global investors wary of putting money directly into China.
- Alibaba’s Global Online Commerce Arm Weighs a US IPO
Wake up call
KWG Group Holdings Ltd. — which develops high-rise apartments, office buildings and shopping malls — became the latest developer to default. This has shocked investors, who now wonder whether the government’s rescue plan is working. Are other property companies on the brink?
- China Builder KWG’s Shares, Dollar Bonds Plunge After Default
… and three things to watch for next week
- Tech earnings. On the schedule are JD.com Inc. and chipmaker Semiconductor Manufacturing International Corp. The latter is this year’s top-performing stock on the Hang Seng Tech Index.
- April reports for trade and inflation are due. We’ll enter the window for the month’s loan data too.
- One way to trade a sideways market is to look at relative-value strategies — or simultaneously buying and selling different securities. Shenzhen-listed stocks are underperforming those in Shanghai right now, as this chart shows
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