China’s efforts to open up its capital markets to a broader set of foreign investors are expected to lead to greater domestic market
volatility and more money flowing in and out of the country, analysts said.To get more
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In particular, the exchange rate of China’s currency, the yuan, may
weaken further as the People’s Bank of China (PBOC) allows market forces
to play a greater role in setting its value, while it focuses on
ensuring the greater volatility does not result in excessive market
movements.
The measures being adopted by the government suggest the PBOC may be moving towards a yuan foreign-exchange regime that is
flexible enough to make China’s capital account more accessible. It
seems geared towards encouraging more widespread use of the yuan for
transactions and central-bank reserves while guarding against
panic-selling and herd behaviour in trading of the currency.
Overseas funds have already started to play a bigger role in the Chinese
bond market, increasing the possibility that funds will start to flow
out of the country, causing greater currency depreciation. Foreign
holdings of Chinese bonds increased by 71.6 billion yuan (US$10.5
billion) to a record 1.68 trillion yuan in August, according to data
from the Central Depository and Clearing Co and Shanghai Clearing House.
The increased foreign holdings come ahead of the anticipated inclusion
of Chinese government and policy-bank bonds in global bond market
indices from next April.
More foreign capital is also expected to flow into Chinese equities as
global index provider MSCI considers plans to increase the weighting of
Chinese A shares in its flagship emerging-market index to 20 per cent
next year. Foreign investors continued to buy more Chinese
domestically-traded shares than they sold for a seventh straight month.
Net inflows came to US$2.6 billion in September, according to BNP
Paribas, bringing the year-to-date total to US$37.1 billion even as the
trade conflict with the United States intensified.
“We are in an environment where the yuan is trending lower but it’s
clear that the PBOC is ensuring that the market will remain orderly,”
said David Beale, Asia Pacific co-head of institutional client coverage
at Deustche Bank Singapore.
Our clients are cautiously timing their entry into China’s bond market,
and we are likely to see interest pick up going into April [next year]
and as the currency becomes more internationalised.”
The yuan’s value has dropped by 6.2 per cent against the US dollar this
year, hitting its weakest level in 21 months on Thursday. Other Asian
currencies have also declined because of the stronger US dollar and
higher US Treasury yields.
Ken Cheung Kin-tai, senior Asian strategist at Mizuho Bank, noted that a
slew of Chinese officials and scholars in recent weeks have embraced a
gradual and controlled decline in the yuan below the closely watched and
psychologically important mark of 7 per dollar, downplaying the idea
that such a level would trigger a financial crisis given the nation’s
economic fundamentals.
