Cash is Leaving China Again, Pressuring Yuan

• A sliding yuan and extensive cash outflows from the mainland into Hong Kong show China's domestic investors are shelving expectations for any immediate recovery in their home markets and fleeing to the closest better-yielding assets. The yuan has dropped to seven-month lows this week, alongside a reversal in equity investment flows into China.
• Analysts said Hong Kong's stockpile of yuan deposits has also grown as mainland investors use their limited offshore investment channels to seek higher yields and companies prepare to pay annual dividends, adding to the pressure on the currency.
• "Sentiment on China soured over the past month as the market has rallied ahead of improvement in macro data, which continues to disappoint," said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments. Tan, whose funds are underweight on Chinese stocks, said sentiment had come a long way from a time when mainland markets were considered "uninvestible", and he expected that it would improve further. However, investor patience has worn thin after months of waiting for authorities to roll out more stimulus, mainly to support a sinking property sector.
• The Shanghai benchmark stock index rose 20% between early February and mid-May, but is down 6% since. Foreigners who had returned to the market since February, after quitting in 2023, have turned sellers too this month, pulling out 33 billion yuan ($4.54 billion) via the northbound leg of the Stock Connect Scheme.
• Domestic investors have used the southbound leg to pump 129 billion yuan into Hong Kong. Analysts say investors have several reasons to pause and reflect, not just about how far the People's Bank of China will ease rates, but also on the approaching July plenum of China's Communist Party to shape economic and fiscal policy.

(Source: Reuters)