Key developments this week:
China’s regulators gave the green light to foreign institutional investors using the onshore FX market to hedge their RMB bond exposures.
Bloomberg-Barclays followed up on an earlier announcement by including China government and policy bonds in a new set of indices.
BlackRock received the first RMB qualified foreign institutional investor (RQFII) quota in the US.
In Panda bond news, Shimao filed for a bond programme, China Orient Asset Management had to cancel its issuance plans, and foreign institutions slammed the slow pace of reform of the Panda regulatory framework.
Global asset managers are pushing the Chinese regulators to take a liberal view on what exchange-traded funds (ETFs) will be included in the upcoming China-Hong Kong ETF Connect.
FX:
Donald Trump's speech to a unified congress on February 28 sent the dollar index higher through the week, with the RMB receding. The dollar fix by PBoC came in at 6.8896 on Friday, down 87bp on a day earlier, and the lowest since February 13. The spot markets saw the spread between onshore RMB (CNY) and offshore RMB (CNH) narrow. The CNY was down 0.26% to 6.8997, and the CNH was down 0.13% to 6.8943, as of 10:30am Hong Kong time, according to Wind data.
The dollar index was trading slightly lower at 102.08, after reaching a new high of 102.14 on March 2. The Thomson Reuters CNY reference index, meanwhile, closed at 95.21 on March 2, up 0.4% in the week. CFETS said that its trade-weighted index had closed in February at 93.84, retreating by 0.4% compared to a month earlier. The BIS basket and the special drawing rights basket, meanwhile, stood at 95.10 and 95.79, down 0.48% and up 0.46%, respectively.
Hubs:
The Taiwan Futures Exchange saw an uptick in trading of RMB options and futures. USDCNH options saw daily average contracts traded nearly triple to 442 in February 2017, while futures nearly doubled to 112 per day.
There seems to be no bottom to the draining of Hong Kong's RMB deposits base. Total RMB deposits fell a further 4.6% in January to Rmb522.5bn ($75.6bn), the lowest level since April 2011. RMB-denominated cross-border trade settlement in Hong Kong also suffered another 5.8% drop to Rmb271bn in the same month, a four-year low.
Flows under the Mutual Recognition of Funds scheme were slow in January 2017. Mainland fund sales in Hong Kong saw overall net sales fall from Rmb9.6bn to Rmb9.4bn. Meanwhile, Hong Kong fund sales in China were also lacklustre, with net overall sales falling 3.8% to Rmb748.6bn in the same month.
Equities:
FTSE Russell added two new A-shares, namely Bank of Shanghai and China United Network Communications, to its FTSE China A50 Index, and removed Daqin Railway and Shanghai RAAS Blood Products, the firm said on March 1. The index provider noted that almost 60% of assets under management for ETFs covering China track a FTSE China index. The FTSE China A50 Index covers the 50 largest A-share companies in China.
The Stock Connect scheme has seen a revival in northbound flows in recent weeks. In February, net purchases on the Shanghai channel amounted to Rmb16.2bn, and Rmb12.1bn on the Shenzhen link. The 28.3bn total comes after a weak January, where Shanghai Connect saw net sales of Rmb41m and Shenzhen Connect just Rmb676m in net purchases.
Bonds:
The Chinese bond market saw market capitalisation fall for the fourth straight month to Rmb44.056tr in February, according to CEIC data. China treasury bonds continued to see selling, as yields fell to 2.62% on March 2 from 2.48% a month earlier. Foreign banks were among those cutting down on China government bond exposures, with total holdings falling 4.9% to Rmb190.6bn. However, foreign banks also increased their holdings of policy and enterprise bonds, with the former seeing holdings rise 6% to Rmb115.6bn and the latter category seeing a 14.5% monthly increase to Rmb393m.
Chart of the week:
