RMB: Internationalisation taking a backseat, for now – Deutsche Bank

Perry Kojodjojo, Strategist at Deutsche Bank, notes that the PBoC sold ~US$46bn, marginally less than in November but still well above the 2016 average of US$35bn which clearly suggests that outflows remain strong.

Key Quotes

“On a quarterly basis, the PBoC sold ~US$141bn in 4Q. As the sum of FX purchasing by the PBoC has a close correlation with the net BoP, the latest data suggests China’s 4Q BoP is likely to remain in a large deficit. This should explain the recent fine-tuning in capital controls by the Chinese authorities.”

“Our indicators suggest that one reason for the strong net outflows is a lack of inflows. Despite the sizeable current account surplus, exporters remained unwilling to convert their FX proceeds into RMB, leading to an increase in net outflows. Based on our estimated FX conversion ratios, exporters converted less than 50% of their proceeds into RMB, likely because of concerns over their ability to buy USD in future, given the tightening capital controls, and their desire to reduce RMB exposure amid expectations for further RMB depreciation.”

“Another reason is the ongoing repatriation of earnings by multinational companies (MNCs). Following the introduction of capital controls by the Chinese authorities and RMB depreciation in August 2015, MNCs have been actively reducing their RMB deposits in China, from ~US$350bn in July 2015 to ~US$132bn in December 2016. This is the lowest holding since the data was first available in December 2014.”

“Unlike the past, outflows are not just driven by foreign investors or debt repayments, but also by domestic residents looking to shift capital offshore. One possible way is tourism channel (Figure 5). Despite the slowdown in domestic visit overseas, tourism outflows remain sizeable. Although China is yet to announce its 4Q BoP data, using the monthly BoP service data, we extrapolate that net tourism outflows (on a 12M moving sum) should be around US$233bn as of 4Q16. This would be the largest on record and ongoing tourism outflows are not only eroding China’s current account surplus but also putting further pressure on the RMB to depreciate.”

“We do not believe that the recent stability in the RMB will last, as 1) we expect the Fed to raise rates at least twice this year, while the PBoC is expected to be on hold; and 2) controls are unlikely to keep outflows at bay for long. We continue to favor owning USD/CNH topside through longer-dated options.”