UBS House View Daily

Thought of the day

10.08 - China battens down the hatches

Chinese FX reserves and balance of payments data released this week show that capital is still flowing out of China. Rebounding FX reserves, which increased by USD 24bn in July, were flattered by a more than USD 30bn positive valuation effect from the weaker dollar, which has also helped push the yuan to a 10-month high on 10 August. And masked investment outflows appear to be continuing, with indicators like SAFE’s overseas holiday spending surging 47% y/y to USD 29bn in June, ahead of an anticipated crackdown.

But while determined capital will continue to seek a way out, it appears China’s efforts to stem unwanted outflows are taking hold:

  • Alongside the weak dollar, the PBoC’s new FX fixing mechanism has helped overturn a glut of depreciative bets against the yuan, ending a key driver of speculative outflow. Today’s higher yuan fix shows continued policymaker comfort with a stronger yuan.
  • Better-than-expected economic growth, with first half GDP growth hitting 6.9%, has made domestic yuan-priced assets more attractive and drawn back more capital. UBS estimates show first half 2017 outflows of USD 56bn, compared with USD 375bn in 2H16.
  • Since end 2016, China has more strictly enforced existing capital control rules, cut overseas lending, and limited Chinese firm’s outbound FDI. At the same time, tentative liberalizations like the Bond Connect program have encouraged inbound flows from overseas.

So while outflows may continue at the margins and even pick up, China appears to have successfully battened down the hatches on capital outflows. The combination of financial stability and continued growth should allow further progress on deleveraging in 2017, and we remain overweight offshore China equities in our Asia tactical asset allocation.

Chart of the day

China battens down the hatches

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