China's Ministry of Finance made two important announcements today.
For the first time, China indicated its intentions to reduce the amount of
yuan-denominated bonds it offers in Hong Kong. It will issue CNY14
bln of bonds in H2 17. This is the
smallest since 2010. It will complement the yuan issue by issuing $2 bln
of USD-denominated bonds.
The changing fortunes of the yuan have
seen its deposits in Hong Kong have been nearly
halved from the CNH 1 trillion reached at the end of 2014.
Chinese officials have tried to curb outflows and arrest the slide in the yuan, which has fallen for three years.
In addition to capital controls, the PBOC is thought to have helped engineer a
liquidity squeeze in Hong Kong that makes it expense to be short.
According to Bloomberg, the overnight rate in Hong Kong is averaging the
highest in at least three years here in 2017.
The US-dollar issue will be the first in over a decade.
Scarcity will likely translate into tight pricing. The five-year dollar
note sold in 2004 yielded about 60 bp more than the comparable US issue at the
time, according to Bloomberg data. The supply may be calibrated to
facilitate the expansion of Chinese banks' offshore expansion.
After finishing 206 near 3.05%, the 10-year (generic) yield rose to 3.70%
by early May. It has
subsequently pulled back. Today at 3.585%, it is the lowest May 5.
It is the fifth consecutive decline and eight of the past 11 sessions.
After a firm Q1, the Chinese economy appears to have lost some momentum, and
the official deleveraging push appears to moderate.
That said, the one-year yield is at 3.63%, keeping the curve
inverted.
The Federal Reserve is widely expected to hike the Fed funds target range
tomorrow. The last two times the Fed hiked, the PBOC quickly followed
with a 10 bp increase in the reverse repo
rate. While investors will scrutinize the PBOC's actions tomorrow and a move is
possible, it seems unlikely that they repeat the snugging.
Capital outflows have slackened (with the help of controls), and the quarter/half end could be disruptive.
President Xi speech in April emphasized a higher priority will be given to financial stability, which also
jives with ideas that ahead of the key meeting in early Q4, officials want to
avoid market unrest.
A week from now, June 20, MSCI will announce whether China's A-shares
(trade in the mainland markets) will be
included in its emerging market indices. A few months ago,
MSCI modified its original proposal to include 169 issues rather than
448. All of the companies in the revised proposal are accessible via the
HK-connect program. By doing so, MSCI addresses several objections from foreign fund managers, including
access and repatriation.
Although some global asset managers
have become more sympathetic to including China's A-shares, there are plenty of
reservations. Trading halts in the mainland and suspensions in HK
frustrate international investors. In Shanghai,
some 77 stocks were suspended or 5.8% of the total as of June 1,
according to a Reuters report. MSCI's stock selection sought to avoid
shares that were suspended for more than
a month.
When MSCI declined to include the A-shares last year (for the third time), it cited three main reasons,
having to do with access, suspension of trading, and local regulators insisting
on pre-approval for financial products that are
linked to A-shares. Limited the inclusion of A-shares to
those accessible on the connect program addresses the access issue.
Suspension and market data issues appear to remain open.
It seems like a close call. Chinese officials want it, and
related capital inflows could help blunt the outflows. MSCI officials
seem to want to push ahead if possible to begin
what appears to be a multi-year process. Chinese shares (that
trade in HK, and in ADRs) account for about 25% of the MSCI emerging market
equity index. The proposed A-share inclusion would account for about 0.5% in the index; a modest step.
Over time, the China's shares may eventually account for 40% of the MSCI
emerging market equity index.
The squeeze, at least partly engineered by China officials, sent the yuan
sharply higher in late May. After making its point, officials
seem to have pulled back, and the yuan
has returned to narrow range trading since early this month. The
IMF's authoritative report on the currency allocation of reserves. In terms of reserve allocation, central banks
appear to move at glacial speeds. We do not expect a significant shift
into yuan, which the IMF now breaks out, alongside the other reserve
currencies.
Disclaimer
China Update
Reviewed by Marc Chandler
on
June 13, 2017
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