Chinese Stocks Tumble As Offshore Yuan Surges Most In 2 Months After Apparent PBOC Intervention

Update - Chinese stocks continue to plunge...

 

Aside from 3 very small adjustments, The PBOC has fixed the Yuan weaker for the last 20 days, driving the mid-line to 6.3962 - the weakest since August 28th.

 

Which was followed bya massive intervention sending Offshore Yuan 0.35% higher and crushing the Onshore-Offshore spread...

 

 

As Offshore Yuan strengtnens most in 2 months...

 

After Chinese stocks collapsed on Friday, they are holding the losses for now as the biggest question remains just what the weighting will be for Yuan inclusion in The IMF's SDR basket (which looks set to be announced tomorrow - US time).

 

Although none of this is likely to end well unless China unleashes something big...

 

And metals continue to collapse...

  • *SGX ASIACLEAR IRON ORE FUTURES DROP 3.7% TO $39.29/TON

And brokerages...

  • Haitong Securities -9.2% after being suspended Friday amid CSRC probe; Citic Securities -1.7%

But the biggest question surrounds The IMF’s decision today (tomorrow) over yuan inclusion in SDR basket (and the actual currency weighting).

IMF’s calculation, based on value of exports of goods & services, suggested a 14%-16% weighting in the $280 bln basket. The yuan fell to a three-month low on Nov. 27 on concern it may have only 10% share of the SDR as formula expected to change, analysts said.

 

A 10% or less weighting will lead to selling, says RBC strategist Sue Trinh. Yuan fell 2.95% ytd, the biggest decline since 1994, as economy slowed and PBOC devalued the currency in Aug. PBOC could widen trading band to 3% or 4% after SDR entry, says Xu Yuehong, analyst at Bank of Communications.

Market expectations:

Eddie Cheung, Hong Kong-based FX strategist at Standard Chartered:

5% of world FX reserves will be in RMB by 2020, with 1% allocated annually to the currency, or $85b of inflows each year; may support Chinese bonds

 

USD/CNY at 6.50 by end-2015; 6.55 in 1Q 2016; 6.42 end-2016

 

Likely weighting of 10% in SDR basket based on expectation IMF will change formula and cut export focus

Khoon Goh, Singapore-based senior FX strategist at ANZ:

As currency isn’t fully convertible, weight could be 10%

 

Capital inflow to increase $230b over next 3-5 yrs, with allocation of yuan in global reserves rising to 4.0% from 1.1%

 

China needs to make bond market and assets more accessible for foreign funds, which would also improve liquidity

 

PBOC likely to intervene less frequently in 2016 compared to this year

 

NOTE: Net capital outflow reached $731bln in the 10 mths to Oct.

Xu Yuehong, Shanghai-based analyst at Bank of Communications:

PBOC could widen yuan trading band to 3% or 4% after SDR entry

 

Any near-term boost to yuan from SDR entry likely offset by strengthening dollar on bets Fed will raise rates

 

PBOC will probably want to avoid sizable and sudden capital flows, so any loosening of controls, expansion of QFII quotas, will be very gradual

Fiona Lim, Singapore-based senior FX analyst at MayBank:

Yuan weighting in SDR basket is estimated at 13-14% according to 2010 calculation method

 

After SDR entry, yuan may have moderate depreciation as PBOC eases with slowing economy, with the central bank intervening intermittently to smooth out volatility

 

IMF may want China to further liberalize capital account, which would be negative for CNY given macroeconomic conditions
Inflows will be gradual as the new basket will only take effect in Oct. 2016

And finally, before everyone gets too excited - The history of yen internationalization offers a cautionary tale on hopes for the yuan.

Japan’s experience suggests that a floating exchange rate, free cross-border flows and stable economic growth are all necessary for successful internationalization. The challenge for China will be hitting all three of those criteria.

 

 

Currency internationalization comes in three stages. The first is use in trade settlement and financial transactions. Second is providing a safe asset for investment by non-residents. Third is to serve as an anchor for the regional and -- ultimately -- global market. In the 1980s and 1990s, the yen made rapid progress from stage one to stage two. Since then, it has stalled and even started to retrace its steps in some respects.

Finally, why Chinese stocks may be persuaded to stay weaker for longer...

To scare The Fed off again.