China: Capital inflows picked up in December – Nomura

China’s headline FX reserves rose by USD20.7bn in December to USD3139.9bn (Consensus: USD3126.8; Nomura: USD3129.3bn), points out the research team at Nomura.

Key Quotes

“After adjusting for FX valuation and coupon payment effects, FX reserves rose by a modest USD10.6bn in December; this is consistent with State Administration of Foreign Exchange (SAFE) comments that the headline gain was mainly FX valuation driven. That said, an adjusted gain of USD10.6bn m-o-m still marks a partial reversal of the USD22.5bn decline in November and suggests a continuation of the benign net flow backdrop that we have observed since August 2017.”

“In our view, this relative stability is consistent with recent improvements in Chinese bond and equity market flows, slower M&A deals, slower long USD/CNY forwards hedging activity, a strong trade surplus (with relatively high levels of FX repatriation) and the softer USD environment that has provided scope for the People’s Bank of China to sporadically buy USD. We note that December bond holdings data from the China Central Depository & Clearing Co showed USD5.7bn of foreign inflows to interbank bonds from USD2.4bn in November.”

“Net equity outflows from China through the two stock connects also slowed to -USD4.3bn in December from -USD8.2bn in November. Meanwhile, China corporate outbound M&A deal announcements also fell slightly to USD8.1bn in December from USD12.1bn in November, as the authorities continue to target outward investments. In addition, we believe the Chinese corporate sector likely further slowed its accumulation of long USD/CNY forwards in December (following the slight increase of USD2bn m-o-m in November to USD87.6bn).”

“While a lack of local financial market volatility from China’s deleveraging drive (thus far) and the current “sweet spot” of still-brisk global growth and subdued inflationary pressures should provide some near-term stability to China’s net capital flows, we remain cautious. We still believe the structural trend of local diversification into foreign assets will continue over the long run and could intensify if China’s downside macro challenges intensify.”

“Reflecting the local bias to send capital out of China, mainland authorities have continued to announce regulations, with recent National Development and Reform Commission rules (26 December 2017) requiring Chinese companies to report unced (30 December 2017) that it will limit overseas cash withdrawals to individuals using Chinese bank cards to RMB100k per calendar year, with a daily cap of RMB10k.”

“Although authorities may be hoping to limit local outflows by tightening outflow controls and contemporaneously attracting foreign inflows (e.g., by pushing for inclusion in large bond indices), there remain significant growth and financial market challenges as the government’s deleveraging push continues. Indeed, we see a risk that local capital outflows will accelerate and dominate, leading to RMB underperformance. We express this view through a long 3x12M USD/CNY NDF spread position, which also serves as a hedge to our broad short USD/Asia portfolio.”