Halister News

(Bloomberg) -- China’s new interbank bond market channel and SDR inclusion of yuan may lead to inflows from central banks seeking higher yields onshore, HSBC senior FX strategist Wang Ju says at a media event today.

• Expects “explosive” CNH trade volume and FX hedging demand when capital account opens up further and more foreigners invest in Chinese bonds
  • If China sees sustained inflow over time, controls may be relaxed on Qualified Domestic Individual Investor Program and corporate outbound investment
  • Foreign ownership of China’s capital market is currently relatively small at less than 2% in bonds and equities, HSBC global head of RMB business development Candy Ho says
  • NOTE: PBOC in Feb. widened foreign accessibility of China’s bond market to include commercial banks, pension funds, asset managers and medium-to-long term institutions

• ONSHORE/OFFSHORE YUAN:
  • Clear trend seen for CNY and CNH spot to converge: Ho
  • Gap between CNY and CNH forwards remain as onshore FX swaps, forward markets still not yet fully open
  • More steps needed such as establishing a market-driven benchmark in interbank market and a fully functional FX options market with free accessibility
  • Until then, it’s difficult to expect China to fully open up the derivatives markets to offshore investors; currently, foreigners using offshore derivatives to hedge
  • SDR bonds to provide diversification to onshore bond market
  • In terms of further capital account liberalization, expect China to widen existing access to onshore yuan denominated-derivatives and commodities

• YUAN OUTLOOK:
• Yuan will remain “relatively weak” this year and next year, given cyclical diversification between China and the U.S., but may appreciate again thereafter, Wang says
  • Sees yuan at 6.75 at end-3Q and 6.9 by yr-end as depreciation cycle vs USD has 1-2 yrs more to go
  • Yuan unlikely to depreciate in long run, given China’s trade surplus and large FX reserves
  • Capital outflow has stabilized at a manageable level since 2Q