Daiwa: "Round Two Of China Capital Outflows Is About To Begin"

Tyler Durden's picture

Now that all eyes have turned on China eager to find how it will react to a potential Fed rate hike in June or July, the question is whether the sharp Chinese devaluation unveiled overnight, which sent the Yuan to fresh 5 year lows, will be a one-off event, and whether the PBOC will intervene far more aggressively in the offshore CNY market to keep FX market turmoil to a minimum.


According to at least one person, the answer is no.

As Kevin Lai, HK-based chief economist of Asia ex-Japan at Daiwa Capital Markets writes in note released overnight, round two of China capital outflows is about to begin, if second half last year was considered the first round.

This is what he believes will happen next:

  • China’s FX reserves may fall below $2t in about a year
  • Downward pressure on FX reserves is most likely to be underestimated as short-term speculative flows are far more ready to leave than real flows
  • Based on estimates, about 49% of PBOC’s FX reserves are made up of flows which are speculative and short-term in nature
  • Expects decline in FX reserves to be more rapid in next 24 months at least
  • Look for further $500b decline to $2.7t by end-2016 and a further $900b decline to $1.7t by end-2017
  • If companies, especially SOEs, face trouble paying back creditors, central government would bail them out
  • Massive bailouts would require government’s monetary policy to turn a lot more aggressive, putting more pressure on yuan
  • Policymakers would have to seriously think about letting CNY slide gradually to a better equilibrium level

His conclusion: the USD/CNY will hit 7.50 by end-2016, some 15% higher than where it is now.

* * *

Others currency strategists were somewhat more sanguine on what happens in China next. Here are several sellside opinions, via Bloomberg:

HSBC (Wang Ju, senior FX strategist)

  • PBOC has found a “good time window” to weaken yuan, with risk appetite supportive, volatility low and credit spread tight
  • Momentum on EM is boosted by gains in equity markets in U.S. and Europe
  • PBOC will stop CNY falling if see pressure spread across Asian assets
  • Narrower CNH-CNY spread is policy-makers’ target; NOTE: Gap now only around 50 pips
  • USD/CNY may rally near term, reaching 6.6 vs dollar end-2Q

Rabobank (Michael Every, head of financial markets research)

  • Weaker fixing is a delayed catch-up by PBOC as other Asian currencies have dropped in recent days on increasingly hawkish Fed
  • China pegging yuan to USD can’t last
  • FX intervention may be going on to “convince” market not to worry despite weaker fixing
  • Forecasts USD/CNY at 7.10 by yr-end

Mizuho Bank (Ken Cheung, Asian FX strategist)

  • Weaker yuan fixing today shows PBOC is allowing currency to decline at gradual pace vs USD
  • Fixing largely in line with expectations

Standard Chartered (Eddie Cheung, Asia FX strategist)

  • CNY fixing is a natural reaction to dollar strength overnight
  • Buoyant global equity markets indicate risk-on attitude
  • Yuan reference rate could have been weakened even further

Saxo Capital Markets (Kay Van-Petersen, global macro strategist)

  • Markets are calm now but there is serious risk of selloff with Fed rate hikes potentially on horizon
  • Better for PBOC to be proactive in devaluing yuan now rather than being forced by market to do so later
  • If China opens bond market and improves transparency and rule of law, could attract a lot of capital, offsetting outflows

One thing is clear as DB confirmed earlier today: the fate of the June rate hike is now in the hands of China.

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nibiru's picture

Maybe it is a nuclear option for Chinese to kill the system? Maybe they are ready to introduce partial gold stardard afterwars? (even Zimbabwe hired Doug Casey to talk about their gold standard!!) http://independenttrader.org/the-power-of-the-sino-russian-alliance-part...

Laowei Gweilo's picture

this is why Vancouver housing ain't going down even remotely soon

any -15% to -30% crash is just going to be a 'Fire Sale' to the rather large Chinese capital still on the sidelines

evidence: just look at how quickly sales volumes ramped up when the Loonie crashed from about 5.2/1 yuan to 4.7/1 yuan, and slowed again as it came back above 5


any 'crash' is mostly going to hurt Canadians that have record levels of debt and are much more leveraged with mortgages (Chinese actually use a lot of mortgages but not because they need to; they do so just out of opportunity cost of low Canadian rates vs high investment rates back home).

anything sort of a complete ban on foreign ownership ain't bringing Vancouver down... and even then, it may be too late considering basically every China I know as a Canadian kid or 'aunty' by now.


and even if Vancouver does go down, it's basically sacrificing 30-45 year old over-leveraged Canadians to make housing affordable for 25-35 year millenials


which they still won't be able to afford because, really, is a 1.2m house suddenly affordable when a 1.6m house wasn't lol?

nibiru's picture

Thank you for vocalising what I'm trying to say! Exactly - they play long game, use fiat to buy assets, secure logistic lines, resources and then when global reset comes (be it from 'natural causes' or by someone pressing nuclear button - China dumping USTs or Saudis) it will be them introducing gold standard and laughing to the bank with new world reserve currency! 

DownWithYogaPants's picture

Yikes with all you read about China you think they're playing a long game?  Dude you are delusional.  They're riding a wave of high asian / rural work ethic and it appears they're going to take that wave and ride it into the ground like any other standard run of the mill bureaucrat.  Seriously they're quite fucked up.

Laowei Gweilo's picture

inability to understand the long game comes from so little experience ever actually seeing it first hand lol

Yen Cross's picture

  Keep an eye on those TIC PBoC holdings. China is selling Yuan against something in order to keep it soft against the $usd.

  They've been winding down Treasury holdings in order to support Yuan outflows for several months.

 My guess is that the PBoC is buying GILTS, and some other European bonds knowing the ECB policy, and the pressure it puts on the euro, which by proxy, causes $usd strength.

Zickster's picture

Bullshit......Do you think for a minute that TPTB are not in command?????

Don't be so naive.....Zickster


Sudden Debt's picture

The money isn't the question, it's the political instability that is growing in China. Once power falls, China implodes.


gregga777's picture

The People's Bank of China is reacting to the global "dollar" (or Eurodollars, which are, of course, not physical dollars but, which are TBTF (too big to fail) ledger book entries used for financing global trade) short. Jeffrey P. Snider at Alhambra Investment Partners has written extensive analyses explaining "dollars" or Eurodollars that should be studied by anyone who wants to understand China's and our predicament.

RagnarDanneskjold's picture
PBoC is still intervening at the moment, cracking down on foreign exchange purchases. The onshore swaps market has been following the global markets though and the banks have been buyers of dollars ahead of expected devaluation.  More on Dollar Shortage: It's Global  Sudden Dollar Shortage in China as Big Banks Buy
Richard Whitney's picture

China will muddle along. They will  combine using FX with using debt to solve the NPL problem, alternately boosting and devaluing the yuan. Inscrutable as always.