CNY fixing: Counter-cyclical factor in play - Westpac

Frances Cheung, Research Analyst at Westpac, explains that deleveraging and inflation expectations are key factors driving the onshore CNY bond markets (Westpac do see the increases in CGB yields as excessive), while the CNY has been fairly stable with no obvious capital outflow risk.

Key Quotes

“The higher CGB and PFB yields will attract inflows, although the amount is likely to remain marginal compared with the sheer size of the onshore market. We continue to expect USD/CNY to trade in a range of 6.60-6.65. Comparing the actual CNY fixing and the estimates from a model that is purely based on daily market changes, we reckon that the counter-cyclical factor (CCF) remains pretty much in play, which should contribute to CNY stability if the fixing remains as a guidance for the market.” 

“Media reports that China has suspended approval of mutual funds that invest more than 80% of their portfolios in HK stocks (there is no official confirmation). Cumulative southbound flows (from onshore China to Hong Kong) amount to more than RMB800bn via Stock Connect, and RMB12.8bn via Mutual Fund Recognition. If southbound flows are reduced, it may tighten CNH liquidity and put upward pressure on CNH forward points. So far there has not been an obvious market reaction.”